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CMA Foundation · Fundamentals of Financial and Cost Accounting · Accounting Principles, Concepts and Conventions

Under AS 2 (Valuation of Inventories), Mehta Traders holds 500 units of an item. Cost is Rs 120 per unit and net realisable value is Rs 110 per unit. Freight inward of Rs 2,500 for these units is already included in the cost of Rs 120 per unit. At what amount should the closing inventory of this item be shown?

Closing inventory is shown at Rs 55,000. AS 2 requires the lower of cost (500 × Rs 120 = Rs 60,000) and net realisable value (500 × Rs 110 = Rs 55,000). Freight is already included in the unit cost, so no further adjustment is needed.

  1. ARs 55,000Correct
  2. BRs 60,000
  3. CRs 57,500
  4. DRs 52,500

Explanation

AS 2 requires inventory at the lower of cost and net realisable value. Cost is 500 × 120 = Rs 60,000 and NRV is 500 × 110 = Rs 55,000, so the lower figure is Rs 55,000. Freight is already inside cost, so deducting it again (Rs 52,500) double counts it.

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