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Zorluk: OrtaValuation and Treatment of Inventory in Final Accounts

At the end of the financial year, a sole proprietor conducted a physical stock count and determined the total cost of closing inventory to be 20,00020,000. Upon inspection, items costing 4,0004,000 were found to be damaged. These damaged items can be sold for 2,5002,500 after undertaking repairs that will cost 500500. In accordance with the prudence concept, what is the correct valuation of closing inventory to be presented in the final accounts?

  1. A
    ₦16,000
  2. ₦18,000Cevap
  3. C
    ₦18,500
  4. D
    ₦20,000

Cevap

The correct valuation of closing inventory is ₦18,000.
According to the principle of prudence, inventory should be valued at the lower of cost and net realizable value (NRV). The undamaged portion costing ₦16,000 is valued at cost. For the damaged portion, NRV is calculated as estimated selling price (₦2,500) minus repair costs (₦500), yielding ₦2,000. Since ₦2,000 is lower than its original cost of ₦4,000, the damaged stock is valued at ₦2,000. Total closing inventory is ₦16,000 + ₦2,000 = ₦18,000.

Adım Adım Çözüm

1
Calculate the cost of undamaged inventory items.
₦20,000 - ₦4,000 = ₦16,000
Separating undamaged inventory allows us to value undamaged goods at cost.
2
Calculate the Net Realizable Value (NRV) of the damaged inventory items.
Estimated Selling Price (₦2,500) - Repair Costs (₦500) = ₦2,000
NRV is defined as the estimated selling price less any costs to complete or make the sale.
3
Apply the rule of valuing inventory at the lower of cost and Net Realizable Value for damaged items.
Lower of Cost (₦4,000) and NRV (₦2,000) = ₦2,000
Under the prudence concept, inventory must be valued at the lower of cost and net realizable value.
4
Sum the value of undamaged goods and damaged goods to find total closing inventory.
₦16,000 + ₦2,000 = ₦18,000
The total valuation combines undamaged goods at cost and damaged goods at NRV.

Anahtar Kavram

Lower of Cost and Net Realizable Value (Prudence Concept)
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Konular

Valuation and Treatment of Inventory in Final Accounts

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