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CA Intermediate · Advanced Accounting · AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies

Kaveri Industries Ltd. changed its inventory valuation from FIFO to weighted average in 2025-26 because the new method gives a fairer presentation. Closing inventory under FIFO would have been ₹12,40,000, and under weighted average it is ₹11,90,000. The effect of the change on earlier periods cannot be ascertained. Which statement is correct under AS 5?

This is a change in accounting policy, and AS 5 requires disclosing the reasons and the amount by which the current period's profit is affected, here a ₹50,000 reduction (12,40,000 less 11,90,000). It is neither an estimate change nor an extraordinary item.

  1. AThe change is a change in accounting policy; its effect on the current year's profit, ₹50,000 reduction, should be disclosedCorrect
  2. BThe change is a change in accounting estimate and needs no disclosure
  3. CThe change should be applied retrospectively by restating prior year profits
  4. DThe change is an extraordinary item of ₹50,000

Explanation

Moving from FIFO to weighted average is a change in accounting policy. AS 5 requires disclosure of the effect in the current period where ascertainable: 12,40,000 - 11,90,000 = ₹50,000 reduction in profit. It is not an estimate change, and AS 5 does not require restating prior years.

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