Skip to content

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

Mahesh Engineering Ltd. changed its method of inventory valuation from weighted average to FIFO in 2025-26 to present more appropriately its financial statements. The effect on current year profit is an increase of Rs 3,00,000, and the effect on prior years' profits is an increase of Rs 5,00,000. Which statement is correct under AS 5?

The change from weighted average to FIFO is a change in accounting policy, not an error or estimate. AS 5 requires disclosure of its material effect where ascertainable, and the prior years' Rs 5,00,000 effect is not reported as a prior period item.

  1. AThe change is an accounting policy change; its impact, to the extent ascertainable, should be disclosed, and the Rs 5,00,000 is not adjusted as a prior period itemCorrect
  2. BThe Rs 5,00,000 should be shown as a prior period item in the current year
  3. CThe change should be treated as a change in accounting estimate with no disclosure
  4. DThe change must be applied only prospectively and never disclosed

Explanation

A change in accounting policy is made when required by statute, a standard, or when it gives a more appropriate presentation. Its impact is disclosed if material and ascertainable. A policy change is not an error, so it is not a prior period item. It is not an estimate change either, and disclosure is required.

Did you get it right without looking?

One question tells you little. A timed set on AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies shows your real accuracy, how long you take and where you lose marks.

Practise AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting PoliciesFree diagnostic mock

More AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies questions