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CA Intermediate · Advanced Accounting · Introduction to Accounting Standards

Mehta Textiles Ltd. changed its method of valuing inventory from FIFO to weighted average during the year because the new method gives a fairer presentation. The change has a material effect on the year's profit. Which treatment is required under accounting standards, as applied to the financial statements of the year?

A switch from FIFO to weighted average is a change in accounting policy, allowed when it gives a more appropriate presentation. The company must disclose the change, the reason and the amount of its material effect on the financial statements, rather than treating it as an estimate.

  1. ATreat it as a change in accounting policy and disclose the change, its reason and the amount of its effect in the financial statementsCorrect
  2. BTreat it as a change in accounting estimate and apply it only to future years without any disclosure
  3. CTreat it as a prior period item and restate all earlier years' profits
  4. DIgnore it, since policies once adopted cannot be changed under any circumstance

Explanation

A change from FIFO to weighted average is a change in accounting policy. It is permitted when required by a statute, by an accounting standard, or when it results in a more appropriate presentation. The change, reasons and material effect must be disclosed. It is not an estimate change, so option 2 is wrong.

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