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ACCA Strategic Professional · Strategic Business Reporting (International) · Analysis and interpretation of financial and non-financial information and measurement of performance

Dorn Co changes its inventory valuation from weighted average cost to FIFO because FIFO gives more reliable and relevant information. Prices have been rising for several years. Under IAS 8, how should the change be dealt with and what is the usual effect on ratios?

The change is applied retrospectively with restated comparatives. Under rising prices FIFO values closing inventory higher than weighted average, so inventory and profit rise and the current ratio improves. It is a policy change, not an estimate change.

  1. AApply prospectively from the current year; current ratio unchanged
  2. BApply retrospectively with restated comparatives; inventory and profit generally increase, raising the current ratioCorrect
  3. CApply retrospectively with restated comparatives; inventory and profit generally decrease, lowering the current ratio
  4. DRecognise the cumulative effect in current-year profit or loss as a change in estimate

Explanation

A voluntary change in accounting policy is applied retrospectively with comparatives restated (IAS 8). With rising prices, FIFO gives a higher closing inventory and lower cost of sales than weighted average, so profit, inventory and the current ratio rise. Treating it as an estimate change or prospectively is incorrect.

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