Which of the following is true regarding the valuation of closing inventory?a)It is valued at the selling price.b)It is valued at cost or net realisable value, whichever is higher.c)It is valued at cost or net realisable value, whichever is lower.d)It is not included in the Trading Account.Correct answer is option 'C'. Can you explain this answer?

Question

Answer

Valuation of Closing Inventory
In accounting, the valuation of closing inventory is an important aspect as it impacts the calculation of cost of goods sold and ultimately the profitability of a business. The correct method of valuation ensures that the financial statements present a true and fair view of the company's financial position.

Correct Valuation Method
The correct method for the valuation of closing inventory is to value it at cost or net realisable value, whichever is lower. This means that the inventory should be valued at the lower of the cost to acquire or produce the inventory and the estimated selling price less any additional costs needed to make the sale.

Reasoning behind the Rule
Valuing closing inventory at the lower of cost or net realisable value ensures that the inventory is not overstated on the balance sheet. If the net realisable value is lower than the cost, it indicates that the inventory may not be sold at a price higher than its cost, and therefore a lower valuation is appropriate.

Impact on Financial Statements
Valuing closing inventory at the lower of cost or net realisable value can have an impact on the company's profitability, as it may result in a lower cost of goods sold and higher gross profit. This, in turn, can affect the company's overall financial performance and the decision-making process for stakeholders.
In conclusion, it is important for businesses to adhere to the correct valuation method for closing inventory to ensure accurate financial reporting and compliance with accounting standards.

Answer

Closing inventory is valued at cost or net realisable value, whichever is lower, to ensure that the inventory is not overstated on the financial statements.

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