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CA Foundation · Accounting · Inventories

An enterprise changes its cost formula for inventories from FIFO to weighted average. Under the general principles of accounting policy disclosure applied with AS 2, what should the enterprise do?

The enterprise should disclose the change in accounting policy and quantify its effect where material. Switching from FIFO to weighted average is a policy change, so it needs disclosure regardless of whether profit rises or falls, in addition to AS 2's requirement to state the cost formula used.

  1. AMake the change without any disclosure because both are permitted formulas
  2. BDisclose the change in accounting policy and its effect, if materialCorrect
  3. CRestate only the opening stock without any disclosure
  4. DDisclose the change only if profit decreases

Explanation

A change in the cost formula is a change in accounting policy. Under AS 1 and AS 5, a change that has a material effect must be disclosed along with its impact, and AS 2 requires the policy used to be disclosed. Disclosure is not dependent on whether profit rises or falls, and silent changes are not permitted.

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