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Difficulty: EasyValuation and Treatment of Inventory in Final Accounts

Match each inventory concept or presentation in final accounts with its correct accounting rule or description.

  • Prudence ConceptInventory is valued at the lower of cost and net realizable value
  • Trading Account TreatmentClosing inventory is deducted from cost of goods available for sale
  • Balance Sheet TreatmentClosing inventory is shown as a current asset

Answer

The Prudence Concept matches with 'Inventory is valued at the lower of cost and net realizable value'. Trading Account Treatment matches with 'Closing inventory is deducted from cost of goods available for sale'. Balance Sheet Treatment matches with 'Closing inventory is shown as a current asset'.
Each inventory valuation rule directly reflects fundamental sole trader accounting principles: the prudence concept governs valuation at lower of cost or net realizable value, the trading account deducts closing inventory to calculate cost of goods sold, and the balance sheet classifies closing inventory as a current asset.

Step-by-Step Solution

1
Identify the valuation basis for inventory.
According to the prudence convention, inventory must be valued at the lower of cost and net realizable value.
This prevents anticipating profit and ensures assets are not overstated.
2
Identify how closing inventory affects the Trading Account.
Closing inventory is deducted from total goods available for sale.
This calculation determines the Cost of Goods Sold for the financial period.
3
Identify the classification of closing inventory on the Balance Sheet.
Closing inventory is listed as a current asset.
It is an unconsumed resource held for resale or production within the upcoming operating cycle.

Key Concept

Valuation and Treatment of Inventory in Final Accounts
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Valuation and Treatment of Inventory in Final Accounts

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