Question

What type of business would expect to have raw materials stock, as well as finished goods ? and Why is stock normally valued at cost price rather than selling price?

Answer 1

Generally, inventory of a business entity includes finished goods itself.

But, well, there are some business entities which comprises finished goods, work in progress and raw material as inventory.

Such business entities are manufacturing entities which purchase raw material - process of production i.e. process of conversion of raw material into finished goods -production of finished goods.

In one statement, all manufacturing entities which are involved in production of finished goods from raw material comprises of raw material as well as finished goods under inventory.

Such stock is generally valued it cost price but not at its selling price as, if stock is valued at selling price then gain is also included but it is unrealized i.e. unrealized gains should not be included in valuation of closing stock.

So it should be generally valued at cost price but not at selling price.