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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

Sagar Textiles Ltd. discovered in the current year that closing stock at the end of the previous year had been overstated by Rs 4,00,000 because of a counting error. Which treatment is correct under AS 5?

The overstatement of last year's closing stock is an error of a prior period. Under AS 5 it is a prior period item, so it is charged in the current year's statement of profit and loss and disclosed separately with its nature and amount. It is not extraordinary and is not adjusted directly through reserves.

  1. ATreat it as a prior period item and disclose it separately in the current year's statement of profit and lossCorrect
  2. BTreat it as an extraordinary item
  3. CRestate the previous year's financial statements and make no disclosure in the current year
  4. DAdjust it directly against general reserve without disclosure

Explanation

Prior period items are income or expenses arising in the current period from errors or omissions in preparing financial statements of one or more earlier periods. The overstated closing stock is such an error. AS 5 requires the item to be separately disclosed in the current statement of profit and loss, with its nature and amount. Adjusting reserves directly or labelling it extraordinary is not permitted.

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