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CMA Foundation · Fundamentals of Financial and Cost Accounting · Accounting Principles, Concepts and Conventions

A company changes from the weighted average method to FIFO for valuing inventory, and the change has a material effect on profit. Under AS 1 (Disclosure of Accounting Policies), what must the company do?

The company must disclose the change in accounting policy and its material effect in the financial statements. AS 1 requires this transparency whether profit goes up or down, so users can compare results across periods and understand the impact of the new method.

  1. ADisclose the change and its effect, if material, in the financial statementsCorrect
  2. BMake no disclosure since inventory methods are always at management's discretion
  3. CRestate the accounts of all earlier years without disclosure
  4. DDisclose the change only if profit decreases

Explanation

AS 1 requires that any change in an accounting policy having a material effect be disclosed, along with the amount of the effect where ascertainable. Disclosure is not dependent on whether profit rises or falls, and it cannot be omitted.

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