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CMA Foundation · Fundamentals of Financial and Cost Accounting · Meaning and Significance of Cost Accounting and its Relationship with Financial Accounting

Which statement about the treatment of stock in the two systems is correct?

Financial accounts value stock at the lower of cost and net realisable value, while cost accounts may apply a consistent cost basis that can differ. Such valuation differences are a common reason why profits in the two sets of books differ and must be reconciled.

  1. ACost accounts value only closing stock, while financial accounts never value stock
  2. BBoth systems must value stock at selling price
  3. CFinancial accounts value stock at lower of cost and net realisable value, while cost accounts may value it on a consistent cost basis that can differCorrect
  4. DCost accounts always value stock at market price

Explanation

Financial accounts follow accounting standards: lower of cost and NRV. Cost accounts use their own consistent basis, which may differ and cause profit differences needing reconciliation. Valuing at selling price is wrong in both.

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