15 October 2009
Suppose, I have a contract to sell 10000 units of goods @ Rs.40/- p.u. and at the year end I have 6000 units in hand. Now at what price I will value the inventory at the year end if its Cost is Rs.45 and its market NRV is Rs.44. What will be your answer if contract price becomes Rs.46/-?
16 October 2009
The valuation of the inventory will have to be done on the principle of Cost or Market value whichever is lower.
So , in the above case U will have to value it at Rs.44/- ( which is the lower of the two).But since the contract price is 40, U will have to value it at 40, since there is no reason to show it at 44 as Sales price is already fixed and U will not get anything more than 40.
However, if the contract price escalates to 46/- U will value it at Rs. 44 taking the above rule.
In short, Principle of Conservatism to be followed, do not account for Profit but account for losses.
CAclubindia
