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CA Intermediate · Advanced Accounting · AS 1 Disclosure of Accounting Policies

Ganga Foods Ltd. had always valued inventory at weighted average cost. In 2025-26 it switched to FIFO, which is permitted under AS 2. The change reduces closing inventory by Rs. 2,40,000 in the current year and is expected to reduce profit in later years too, but the amount is not ascertainable. Profit before the change was Rs. 15,00,000. How should the company deal with this under AS 1?

Profit is Rs. 12,60,000 (15,00,000 less 2,40,000 reduction in closing inventory), and the company must disclose the change in policy, the Rs. 2,40,000 effect in the current year, and that the later effect is not ascertainable, as AS 1 requires.

  1. AReport profit of Rs. 15,00,000 and give no disclosure, as both methods are permitted
  2. BReport profit of Rs. 12,60,000 and disclose the change with the Rs. 2,40,000 effect, noting later effect is not ascertainableCorrect
  3. CReport profit of Rs. 17,40,000 and disclose the change
  4. DReport profit of Rs. 15,00,000 and disclose the Rs. 2,40,000 only in a note

Explanation

A reduction in closing inventory of Rs. 2,40,000 lowers profit: 15,00,000 - 2,40,000 = 12,60,000. The change is a policy change with material effect, so AS 1 requires disclosure of the current-period effect and a statement that later effects are not ascertainable. Adding the amount (Rs. 17,40,000) wrongly reverses the sign. Leaving profit unadjusted ignores the change.

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