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

Kaveri Foods Ltd. changed its inventory valuation from weighted average to FIFO from the current year. Closing inventory under FIFO is ₹18,40,000, while under weighted average it would have been ₹17,90,000. Assume no other effect and ignore tax. As per AS 1, which disclosure is appropriate in the current year's financial statements?

The company should disclose the policy change and state that profit is higher by ₹50,000. Closing inventory under FIFO exceeds that under weighted average by ₹50,000, which lowers cost of goods sold by the same amount. AS 1 requires disclosure of the material effect where ascertainable.

  1. ADisclose the change and that profit for the year is higher by ₹50,000 because of itCorrect
  2. BDisclose the change and that profit for the year is lower by ₹50,000 because of it
  3. CDisclose the change but not the amount, since the amount is optional
  4. DAdjust opening reserves by ₹50,000 and make no disclosure

Explanation

Closing inventory is higher by 18,40,000 - 17,90,000 = ₹50,000 under FIFO. Higher closing inventory reduces cost of goods sold, so profit is higher by ₹50,000. AS 1 requires the material effect to be disclosed, so the amount is not optional. Option B reverses the sign.

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