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Difficulty: EasyClosing Stock Valuation and Adjustments

At the end of the financial year, a trader's inventory has a cost price of N45,000\text{N}45,000 and a net realizable value of N40,000\text{N}40,000. In accordance with the prudence concept, at what value should the closing stock be recorded in the final accounts?

  1. N40,000\text{N}40,000Answer
  2. B
    N45,000\text{N}45,000
  3. C
    N85,000\text{N}85,000
  4. D
    N5,000\text{N}5,000

Answer

The closing stock should be recorded at N40,000\text{N}40,000, which is the lower of cost and net realizable value.
Under the prudence concept and standard accounting rules (IAS 2 / SAS 4), closing stock must be recorded at the lower of cost and net realizable value. Since the net realizable value (N40,000\text{N}40,000) is lower than the cost price (N45,000\text{N}45,000), the inventory is valued at N40,000\text{N}40,000.

Step-by-Step Solution

1
Identify the given inventory values
Cost price = N45,000\text{N}45,000; Net Realizable Value (NRV) = N40,000\text{N}40,000.
Both figures are required to apply the valuation rule.
2
Apply the inventory valuation rule based on the prudence concept
Lower value = N40,000\text{N}40,000.
Accounting standards dictate that inventory must be valued at the lower of cost and net realizable value to avoid overstating assets and profit.

Key Concept

Lower of Cost and Net Realizable Value (Prudence Concept)
Estimated Time:45s
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Topics

Closing Stock Valuation and Adjustments

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