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

Kaveri Foods Ltd. changed its method of valuing inventory from FIFO to weighted average in the current year. The change has a material effect, and the closing inventory under weighted average is Rs. 4,10,000 against Rs. 4,50,000 under FIFO. Which treatment complies with AS 1?

The change from FIFO to weighted average is a material accounting policy change, so it must be disclosed along with its effect. Closing inventory falls by Rs. 40,000 (4,50,000 less 4,10,000), so profit reduces by Rs. 40,000, and this amount is disclosed.

  1. ANo disclosure, as inventory valuation is an estimate
  2. BDisclose the change and its effect, amounting to a Rs. 40,000 reduction in profit, in the financial statementsCorrect
  3. CDisclose the change and show a Rs. 40,000 increase in profit
  4. DAdjust opening reserves by Rs. 40,000 without any disclosure

Explanation

Any change in an accounting policy having a material effect must be disclosed with the amount by which financial statements items are affected, to the extent ascertainable. Closing inventory falls by 4,50,000 - 4,10,000 = Rs. 40,000, so profit reduces by Rs. 40,000. An increase would be the wrong sign.

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