Change in accounting policy may have a material effect on the items of financial statements.” Explain the statement with the help of an example.

Change in accounting policy may have a material effect on the items of financial statements. For example, cost formula used for inventory valuation is changed from weighted average to FIFO. Unless the effect of such change in accounting policy is quantified, the financial statements may not help the users of accounts. Therefore, it is necessary to quantify the effect of change on financial statement items like assets, liabilities, profit/loss. For Example, Omega Enterprises revised its accounting policy relating to valuation of inventories to include applicable production overheads.