Goddard has used the FIFO method of inventory valuation since it began operations in 1987. Goddard decided to change to the weighted-average method for determining inventory costs at the beginning of 1990. The following schedule shows year-end inventory balances under the FIFO and weighted-average methods:
Year FIFO Weighted-average
1987 $45,000 $54,000
1988 78,000 71,000
1989 83,000 78,000
What amount, before income taxes, should be reported in the 1990 retained earnings statement as the cumulative effect of the change in accounting principle?

Ans: 5000 decrease.

Can anyone explain why they r not taking 1987 year into account (as this is comparative financial statement) ???????and why only difference of the year 1989 taken here?????

Hello :)

 

This week I started my journey with FAR again! This time... I am NOT going to stop!!! (Sent all my problems overseas... and paid for them to stay there until I am ready for the exam lol)

 

Anyway, I am going to take a risk and try to answer this question. BUT... please, pay attention to my explanation because I am a veeeery creative person :)

 

GR: A change in inventory valuation is considered to be a change in principle, so it is treated RETROSPECTIVELY!

 

The meaning of treating retrospectively:

 

1) ALWAYS: Adjust the beginning RE (of the EARLIEST period presented) under "Adjustment for changes in accounting principle". It's your cumulative effect of the change.

 

My little comment/understanding: You do this regardless whether your prior period FSs are presented comparatively or not! With this said... You MUST always adjust your beginning RE for the cumulative effect of the change in acct. principle (earliest period presented; NET of tax)

 

2) For Comparative FSs: When you DO present your FSs from prior periods... You simply ADJUST EACH account (for instance, your Inventory, CGS... so also Tax Expense) affected by applying your NEW acct. principle (as it has been always used in those prior periods).

 

Going to your question... For instance, when you report on year 1989 & 1990 then you must adjust all related accounts of your 1989 FSs. And show your cumulative effect of these changes as an adjustment to the beginning RE (under "Adjustment for changes in accounting principle"). Remember it has to be NET of tax!!!

 

My guesses/comments for the answer to be $5,000 :) 

 

You were probably asked to report ONLY on both years: 1989 & 1990.

 

I strongly believe, a question would clearly state which years to compare!  But I might be wrong... It's my guessing :)

 

 

3) JE as of 1/1/1990

 

         Retained Earnings   5,000

              Inventory                 5,000

 

** -- **

 

Once again... This is a GREAT question because you made me truly panic! lol :)

 

Please.... Help us to find the correct reason!  I must be honest... I am guessing!

 

Eresse (crying & begging for help) :)

Let me say this, "I don't know where in question you are going to have this info :)  BUT... I believe this should be stated somewhere"  If not.... I have an idea, but let me work on some questions today. And in case, I don't find what I would be looking for, I will ask my instructor in class on Tuesday. And of course, share his explanation with you later :)