Explain the impact of changing inventory valuation methods on financial statements.

True or False: The choice of accounting policy can lead to either an understatement or overstatement of a company's financial position.

True

What are the major areas where different accounting policies are frequently encountered?

Valuation of Inventories and Valuation of Investments are the major areas where different accounting policies are frequently encountered.

Fill in the blank: Long-term investments are typically valued at their ___ cost, adjusted for any ___ in value.

Acquisition, permanent diminution

What should be considered when selecting accounting policies to ensure fair presentation?

Consider key factors for fair presentation.

• Prudence avoids overstatement risks.

• Substance over form emphasizes reality.

• Materiality ensures relevant disclosures.

Short Answer: Why is it important to disclose the treatment adopted for accounting items?

Transparency in Accounting Treatment

• Enhances understanding of finances.

• Builds trust with stakeholders.

• Aids in regulatory compliance.

True or False: Changes in accounting policies are always optional and do not need to be documented.

False: Changes in accounting policies must be documented, especially when required by law or for compliance with accounting standards.

What is the consequence of selecting an inappropriate accounting policy?

Selecting an inappropriate accounting policy misrepresents finances.

• Misleading financial statements occur.

• Stakeholders may make poor decisions.

• Trust in the company diminishes.

Explain the role of the Institute of Chartered Accountants of India (ICAI) in accounting policies.

ICAI streamlines accounting policies.

• Provides Guidance Notes for clarity.

• Establishes Accounting Standards for compliance.

• Ensures consistency in financial reporting.

What does it mean to apply the principle of 'substance over form' in accounting policies?

Substance over form prioritizes economic reality.

• Focus on actual transaction outcomes.

• Reflects true financial performance.

• Ensures accurate financial reporting.

What are the three major characteristics to consider when selecting accounting policies?

Prudence, Substance over form, and Materiality.