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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

Mehta Engineering Ltd. changed its method of inventory valuation from weighted average to FIFO in 2025-26 to present a fairer view. Closing inventory for 2025-26 is Rs 6,40,000 under FIFO and Rs 5,90,000 under weighted average. The opening inventory was Rs 4,00,000 under both methods. Under AS 5, what is the impact of the change on the current year's profit and what must be disclosed?

Profit rises by Rs 50,000, being the difference between FIFO closing stock of Rs 6,40,000 and weighted average closing stock of Rs 5,90,000 with equal opening stock. AS 5 requires disclosure of the reasons for the policy change and the amount of its effect.

  1. AProfit is higher by Rs 50,000 and the amount of the impact must be disclosedCorrect
  2. BProfit is lower by Rs 50,000 and the amount of the impact must be disclosed
  3. CProfit is higher by Rs 50,000 but no disclosure is required as it is an estimate change
  4. DProfit is higher by Rs 2,40,000 and the amount must be disclosed

Explanation

Opening stock is the same under both methods, so the profit difference equals the closing stock difference: 6,40,000 - 5,90,000 = Rs 50,000 higher profit under FIFO. A change in accounting policy with a material effect requires disclosure of the reasons and the amount of the impact. It is a policy change, not an estimate change, so disclosure is needed.

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