Page 12 - DCOM409_CONTEMPORARY_ACCOUNTING

Unit 1: Accounting Standards

its own accounting policies. Accounting policies refer to the specific accounting principles Notes
and the methods of applying those principles adopted by the enterprise in the preparation
and presentation of financial statements.
AS-1 lays down the following requirements:
(a) All significant accounting policies adopted in the preparation and presentation of
financial statements should be disclosed in one place as a part of financial statements.

(b) Any change in the accounting policies which has a material impact in the current
period or which is expected to have a material effect in later periods should be
disclosed and the amount by which any item in the financial statements is affected
by such change should also be quantified and disclosed to the extent ascertainable.
When such amount is not ascertainable, the fact should be mentioned.
(c) If any of the fundamental accounting assumptions (viz., going concern, consistency
and accrual) is not followed, the fact should be disclosed.
2. AS-2 – Valuation of Inventories: Inventories include:

(a) Raw materials and components
(b) Work-in-process
(c) Finished goods
(d) Stores and spares
Inventories should be valued at lower of historical cost and net realisable value. For the
purpose of comparing historical cost with net realisable value, each item in the inventory
should be dealt with separately or similar items may be dealt with as a group.
However, the above principle of inventory valuation is not applicable in cases of:
(a) Consumable stores and supplies: Should be ordinarily valued at cost.

(b) By-products: Where cost of by-product cannot be separately determined, it should be
valued at net realisable value.
(c) Reusable waste: Should be valued at raw material cost less processing cost.
(d) Non-reusable waste: Should be valued at net realisable value.

3. AS-3 – Cash Flow Statement: The Companies Act, 1956 does not require corporate entities
to prepare and present cash flow statement as part of financial statements. However,
listing agreement of different stock exchanges require corporate entities to submit cash
flow statement to the respective stock exchanges. Thus, listed companies are bound to
prepare cash flow statement.
The cash flow statement should clearly show cash flows from three distinct activities:
(a) cash flows from operating activities
(b) cash flows from investing activities
(c) cash flows from financing activities
4. AS-4 – Contingencies and events occurring after the balance Sheet date: Contingencies are
conditions or situations, the ultimate outcome of which, gain or loss, will be known or
determined only on the occurrence or non-occurrence, of one or more uncertain future
events. Estimates are required for determining the amount to be stated in financial
statements for many items, e.g., depreciation, provision for doubtful debts, provision for
taxation, etc. However, the fact that the items have been estimated does not make the
items contingencies.

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