CA Foundation · Accounting · Inventories
Which of the following is a correct reason for writing down inventories below cost to net realisable value?
Inventories are written down to NRV when cost is not recoverable, for example because selling prices have fallen or goods are damaged or obsolete. A rise in market value does not change the value above cost, and age or tax reasons alone do not justify a write-down.
- AInventories have been held for more than one year
- BSelling prices have fallen or the goods have become damaged or obsoleteCorrect
- CThe market value of the goods has risen above cost
- DThe firm wishes to reduce its taxable profit
Explanation
Cost may not be recoverable when goods are damaged, wholly or partly obsolete, or when selling prices have declined or costs of completion or sale have increased. Rising market value does not lead to a write-up, since stock is not valued above cost. Age alone or tax motives are not valid grounds.
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