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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

Arjun Pharma Ltd. changed its method of valuing inventory from weighted average to FIFO in 2025-26 because FIFO gives a more appropriate presentation. The change raises the closing inventory and profit for the year by Rs 4,50,000. Which treatment is correct under AS 5?

Arjun Pharma must disclose the change from weighted average to FIFO and the Rs 4,50,000 effect on the current year's profit. AS 5 allows a policy change for a more appropriate presentation but requires disclosure of the change and its ascertainable impact; it is not an extraordinary item.

  1. ADo not disclose the change because profit increases
  2. BRestate the previous years' accounts and show no effect in the current year
  3. CDisclose the change and the Rs 4,50,000 impact, since the change has a material effect on the current periodCorrect
  4. DTreat the Rs 4,50,000 as an extraordinary gain

Explanation

A change in accounting policy is allowed when required by statute, a standard, or when it results in a more appropriate presentation. AS 5 requires disclosure of the change and the amount by which any item in the financial statements is affected, to the extent ascertainable. Here the Rs 4,50,000 effect is shown in the disclosure. Restating earlier years is not what AS 5 prescribes.

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