The correct answer is: A. cost or market value whichever is lower.
Stock is normally valued according to the lower of cost or market value. This means that the value of stock is recorded at the lower of the cost of acquiring the stock or the current market value of the stock. This rule is designed to ensure that the value of stock is not overstated in the financial statements.
Cost is the price paid for the stock, plus any additional costs incurred in bringing the stock to its present location and condition. Market value is the price that could be obtained for the stock in the open market.
If the market value of stock falls below its cost, the stock must be written down to its market value. This is known as a ‘stock write-down’. A stock write-down results in a decrease in the value of the company’s assets and a corresponding decrease in its profit.
The rule of ‘cost or market value whichever is lower’ is applied to all types of stock, including raw materials, work in progress, and finished goods.
Here is a brief explanation of each option:
- A. cost or market value whichever is lower. This is the correct answer. The value of stock is recorded at the lower of the cost of acquiring the stock or the current market value of the stock.
- B. market value. This is not the correct answer. The value of stock is not always recorded at market value. If the market value of stock falls below its cost, the stock must be written down to its cost.
- C. replacement cost. This is not the correct answer. Replacement cost is the cost of replacing the stock. The value of stock is not always recorded at replacement cost.
- D. net realisable value. This is not the correct answer. Net realisable value is the estimated selling price of the stock less the estimated costs of completion and selling. The value of stock is not always recorded at net realisable value.