Hello Ltd. purchased goods at the cost of Rs.20 lakhs in October.

Question:
Hello Ltd. purchased goods at the cost of Rs.20 lakhs in October. Till the end of the financial year, 75% of
the stocks were sold. The Company wants to disclose closing stock at Rs.5 lakhs. The expected sale value
is Rs.5.5 lakhs and a commission at 10% on sale is payable to the agent. You are required to ascertain the
value of closing stock?

Answer:
According to accounting standards “Valuation of inventory”, inventory is valued at lower of cost or net
realizable value. The net realizable value is the difference between sales revenue and selling expenses.

Working for net realizable value
Sales Commission = Sales * Sales Commission %
= 550000*10%
= 55000

Working for value of closing stock using lower of cost or NRV method
Cost of inventory = 500000
Net Realizable Value = 495000

Value of closing stock = Lower of cost of inventory or net realized value
= 500000 – 495000
= 5000

As per “Valuation of inventories”, inventory is valued at lower of cost of inventory or net realizable value
of inventory.

The cost of inventory is 5,00,000 and net realizable value is 4,95,000. So, the value of closing stock
should be valued at 4,95,000.