Financial statements of one accounting period must be
comparable to another in order for the users to derive meaningful conclusions
about the trends in an entity's financial performance and position over time. Comparability
of financial statements over different accounting periods can be ensured by the
application of similar accountancy policies over a period of time.
A change in the accounting policies of an entity may be
required in order to improve the reliability and relevance of financial
statements. A change in the accounting policy may also be imposed by changes in
accountancy standards. In these circumstances, the nature and circumstances
leading to the change must be disclosed in the financial statements.
Financial statements of one entity must also be consistent
with other entities within the same line of business. This should aid users in
analyzing the performance and position of one company relative to the industry
standards. It is therefore necessary for entities to adopt accounting policies
that best reflect the existing industry practice.
Example
If a company that retails leather jackets valued its
inventory on the basis of FIFO method in the past, it must continue to do so in
the future to preserve consistency in the reported inventory balance. A switch
from FIFO to LIFO basis of inventory valuation may cause a shift in the value
of inventory between the accounting periods largely due to seasonal
fluctuations in price.
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