1. IAS 8 Accounting policies, changes in accounting estimates and errors distinguishes between a change in accounting policy and changes in accounting estimates. Mr. MacDonald an Accountant want to include a change in accounting policy in the financial statements for 2015 as the company has for the first time started to hold inventory, the company wants to use the FIFO Method.

Required

1. What is a change in accounting policy and when is a company permitted to change its accounting policy according to IAS 8? (5 marks)
2. Where a change in accounting policy does not apply, explain what would apply (2 marks).
3. Explain if Mr. MacDonald is correct in his intention of treating the inventory as a change in accounting policy? (3 marks)

(b) During 2021 Longhorn Pty Ltd discovered that certain items had been included in inventory at 31 December 2020 valued at P 4.2 Million, which had in fact been sold before the year end. The following figures for 2020(as reported) and 2021 (draft) are available.

2020 2021

P000 P000

Sales 47,400 67,200

Cost of goods sold (34,570) (55,800)

Profit before taxation 13,030 11,400

Income taxes (3,880) (3,400)

Profit for the period 8,950 8,000

At 1 January 2020, retained earnings were P13 Million. For 2021, the cost of goods sold includes the P4.2 million inventory opening mistake. For 2020 and 2021, the income tax rate was set at 30%. There has been no dividends declared or paid.

Prepare a profit or loss statement and retained earnings for 2021 together with their comparatives (15 marks).