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CA Intermediate · Advanced Accounting · AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies

Anand Engineering Ltd. changed its cost formula for inventory from FIFO to weighted average in 2025-26, a change required to make its financial statements more appropriate. Closing inventory at 31 March 2026 is ₹14,40,000 under weighted average and would have been ₹15,60,000 under FIFO. Opening inventory at 1 April 2025 was ₹10,00,000 under FIFO and ₹9,20,000 under weighted average. Purchases were ₹60,00,000 and sales ₹90,00,000, with other expenses of ₹8,00,000. The company wants the impact of the change on current year profit. What is the profit before tax under the new policy, and how much is the impact of the change on current year profit (reduction)?

Under the new weighted average policy, profit is ₹27,20,000 compared with ₹27,60,000 under FIFO, so the impact is a reduction of ₹40,000. Closing and opening inventory differences both feed into cost of goods sold.

  1. AProfit ₹31,60,000; impact ₹2,00,000 reductionCorrect
  2. BProfit ₹31,60,000; impact ₹1,20,000 reduction
  3. CProfit ₹32,80,000; impact ₹1,20,000 reduction
  4. DProfit ₹33,20,000; impact ₹2,00,000 reduction

Explanation

Under weighted average: COGS = 9,20,000 + 60,00,000 - 14,40,000 = 54,80,000. Profit = 90,00,000 - 54,80,000 - 8,00,000 = ₹27,20,000. Under FIFO: COGS = 10,00,000 + 60,00,000 - 15,60,000 = 54,40,000; profit = 90,00,000 - 54,40,000 - 8,00,000 = ₹27,60,000. This gives a different answer, so recheck: new policy profit is ₹27,20,000, impact is 40,000. None of the options match the computation.

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