Avery
Instrument Corp., a small company that follows ASPE, began operations on
January 1, 2008, and uses a periodic inventory system. The following net income
amounts were calculated for Avery under three different inventory methods:
FIFO Avg
Cost LIFO
2008 26,000 24,000 20,000
2009 30,000 25,000 21,000
2010 28,000 27,000 24,000
2011 34,000 34,000 26,000
Instructions
Answer
the following, ignoring tax considerations.
(a)
Assume that in 2011 Avery changed from the average cost method to the FIFO
method of costing inventories and it was agreed that the FIFO method provided
more relevant financial statement information. Prepare the necessary journal
entry for the change that took place during 2011, and provide all the
information that is needed for reporting on a comparative basis.
(b)
Assume that in 2011 Avery, which had been using the LIFO method since
incorporation in 2008, changed to the FIFO method of costing inventories in
order to comply with CICA Handbook, Part II, Section 3031, since LIFO is no longer
a permitted inventory cost flow assumption under GAAP. The company applies the
new policy retrospectively in accordance with the transitional provisions of
the Handbook section. Prepare the necessary journal entry for the change, and
provide all the information that is needed for reporting on a comparative
basis.
(a) Inventory**.............................. 8,000
Retained
Earnings – Cumulative Effect of
Change in Accounting Policy...... 8,000 *
*2008 $2,000 ($26,000 – $24,000)
*2009 5,000 ($30,000 – $25,000)
*2010 1,000 ($28,000 – $27,000)
$8,000
** Cost of Goods Sold could be used if the inventory
is already adjusted at year-end.
Information shown in comparative form as follows:
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2011
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2010
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2009
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2008
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Net income (Note A)
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$34,000
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$28,000
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$30,000
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$26,000
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Note A:
In 2011, inventory has been calculated by the first-in,
first-out method. In prior years, from incorporation, inventory had been
calculated by the average cost method. The new method of inventory costing was
adopted to provide more relevant financial statement information and has been
applied retrospectively to inventory valuation of prior years. The impact of the change is an increase
(decrease) in inventory of $XXX (increase (decrease) in 2010 of $XXX), increase
(decrease) in cost of goods sold of $XXX (increase (decrease) in 2010 of $XXX),
increase in net income of $4,000 (increase in 2010 of $1,000), an increase of
opening retained earnings of $8,000 (increase of $7,000 in 2010) and an
increase in earnings per share of $XXX (increase in 2010 of $XXX).
(b) Inventory**.......................... 19,000
Retained
Earnings.................... 19,000 *
*2008 $ 6,000 ($26,000 – $20,000)
*2009 9,000 ($30,000 – $21,000)
*2010 4,000 ($28,000 – $24,000)
$19,000
** Cost of Goods Sold could be used if the inventory
is already adjusted at year-end.
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2011
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2010
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2009
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2008
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Net income
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$34,000
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$28,000
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$30,000
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$26,000
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Note A:
In 2011, inventory has been calculated by the first-in,
first-out method. In prior years, from incorporation, inventory had been
calculated by the last-in, first-out method.
The change is due to the initial application of the revised CICA
Handbook, Part II, section 3031 requirement. The new standard has been applied
retrospectively to inventory valuation of prior years in accordance with the
transitional provisions. The impact of
the change is an increase (decrease) in inventory of $XXX (increase (decrease)
in 2010 of $XXX), increase (decrease) in cost of goods sold of $XXX (increase
(decrease) in 2010 of $XXX), increase in net income of $8,000 (increase in 2010
of $4,000), an increase of opening retained earnings of $19,000 (increase of
$15,000 in 2010) and an increase in earnings per share of $XXX (increase in
2010 of $XXX).
