Commercial Applications
"Closing stock is always valued at market price." Justify for or against by citing two reasons.
Answer
AGAINST — The statement is incorrect. Closing stock is always valued at cost price or market price, whichever is lower, not always at market price.
Reasons:
Principle of Conservatism (Prudence) — This principle requires that all anticipated losses must be recorded but anticipated gains should be ignored. Valuing closing stock at the lower of cost or market price ensures that profits and assets are not overstated and that the firm does not present a more favourable financial position than what it actually is.
Avoidance of Secret Reserves and Unrealised Profits — If closing stock were always valued at market price (when market price is higher than cost), the firm would be recognising unrealised profits, which violates the Realisation Principle. Valuing at lower of cost or market price avoids the recognition of profits that have not yet been earned through actual sales.