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

Kaveri Foods Ltd. changed its inventory cost formula from FIFO to weighted average in 2025-26 to better reflect usage. The change has a material effect. Closing inventory under the new method is ₹4,80,000 whereas it would have been ₹5,10,000 under FIFO. Which treatment accords with AS 1?

AS 1 requires disclosure of a material change in accounting policy, including the reason and the amount by which financial statement items are affected, as far as ascertainable. Here closing inventory is lower by ₹30,000, so profit is lower by that amount, and this effect must be disclosed.

  1. ANo disclosure is needed because the change is only a matter of estimate
  2. BDisclose the change and its reason, and quantify the effect of ₹30,000 reduction in closing inventory on the profit for the period, to the extent ascertainableCorrect
  3. CDisclose only the new policy, without mentioning the amount of the effect
  4. DRestate the previous year's published statements and make no disclosure in the current year

Explanation

AS 1 requires that a change in accounting policy having a material effect be disclosed, with the amount by which financial statement items are affected, to the extent ascertainable. Here closing inventory falls by 5,10,000 - 4,80,000 = ₹30,000, which reduces profit by ₹30,000. Merely disclosing the new policy is not enough.

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