Finance & Accounts
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Activity:
Question posted: 05 12 2008 08:26:21 +0000,
11 answers, 219 views, last activity
07 06 2010 20:18:08 +0000
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i am being asked with a question while in an interview that , suppose you brought your stock for 100 crore and some changes in the market the cost been substantially reduced to say 80 crore then the question was where do you show the effect of 20 crore in balansheet , please give the answer
In Balance Sheet, the stock will be shown at cost or market price whichever is lower. i.e. it will be shown at Rs 80 crores due to various assertions and accounting assumptions implied.
The effect of Rs 20 crores will be reflected in Profit & Loss A/c, because closing stock will be shown at Rs 80 not 100. So our profit will be less by that much amount. The deficiency of 20% will be shown in the notes and this treatment will be as per Accounting Policy previously adopted.
I do not agree with the answer of learned Shri Arun Gandhi to show it as loss of Capital Gain, because this item we have purchased with intention of resale and to earn profit and to deal in this item is our regular business.
The difference of 20 crores in Closing Stock will be affected in P&L The profit will be less with that amount.
You must take the closing stock as 80 crores only.It will reflect in Balance Sheet.
If Inventory is valued at 80 Crores after some changes in the market the cost been substantially reduced then it shows the effect of 20 crore in balansheet automatic. And that Loss 20% has to be shown in P&L.
Yest the closing stock being lower by 20% the impact would be on P&L
The Market value or Cost Value which ever is loss shall be effected in the Financial statment. After the effect is is Market Value i,e, 80 Crore shall be taken. Inthis case impirment of assets does not effect.
Agreed, Loss is shown in P&L And Inventory is valued at 80 Crores.
Agreed, Loss is shown in P&L And Inventory is valued at 80 Crores.
The closing stock value taken as cost or market whichever is less basis. The difference automatically reflect on P & L A/c and B & S
As per AS 2 Inventory, Inventory should be valued lower of cost or net realisable value and difference should charge to P&L. However there is an exception to that. In case where final products in which you will be using particular inventory item which is less than market value but the market value of final product is more than total cost to manufacture, then there is no need to reduce the raw material item to its market value which is less than cost.
20% loss on account of devaluation of Inventory market value should go to profit & loss account.
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