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

Meghna Traders Ltd. changed its method of inventory valuation from weighted average to FIFO this year. The change is material. Closing inventory under FIFO is ₹6,40,000, whereas under weighted average it would have been ₹5,90,000. Opening inventory is unaffected by the change for this year's accounts. Which of the following is the correct application of AS 1 for the effect of the change on this year's profit?

Profit is higher by ₹50,000. Closing stock under FIFO is ₹50,000 more than under weighted average, which reduces cost of goods sold by that amount. AS 1 requires the material effect of the policy change to be disclosed where it can be ascertained.

  1. AProfit is higher by ₹50,000 and this amount should be disclosedCorrect
  2. BProfit is lower by ₹50,000 and this amount should be disclosed
  3. CProfit is higher by ₹6,40,000 and this should be disclosed
  4. DNo amount need be quantified as the change is an estimate

Explanation

Closing inventory under FIFO ₹6,40,000 less ₹5,90,000 under weighted average gives ₹50,000 higher closing stock. Higher closing stock reduces cost of goods sold, so profit is higher by ₹50,000. AS 1 requires disclosure of the effect where ascertainable. Option B has the wrong sign.

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