Eresse

Thanx so much for your help.....:)

The question asks for the cumulative effect on RE for 2009 only. That is the difference of RE's beginning balance (that is still unadjusted for the change in accounting principle) and what the beginning balance ought to be from applying the weighted average method. Here is how i broke it down,

Since 87' is the first year presented, and there are no prior periods before that year, we assume 87' was the first year of business. Then, the retrospective adjustment from the change in accounting principle is applied starting from 87' and forward 

................Retainted Earnings (T account)

1/1/87.......................cr.0 -->no change*

NI.............................cr.XX --> changes FIFO to WA**

12/31/87....................cr.XX -->changes old to new **

*notice no cumulative effect adjustment is made to the beg bal bc there was no inventory at this date yet. no inventory, means $0 cogs, $0 NI, and $0 RE.

**Later in that same year revenues are generated, expenses are incurred, and NI is the end result. However 87's financials were issued 3 years ago. This means 2 things; (1) NI was computed under the old FIFO method (2) and bc the change in principle affects the amount of NI previously stated it requires the financials to be restated. (87's financials wouldnt need to be restated if they were not being used for comparative purpose, but they are so more work for us). NI wont be the only account affected by this change. Therefore, any affected account will be subject to the same adjustments, such as the ending balance for RE's that is currently understated. Other accounts include the tax liability account (b/s), cogs (i/s), i think that's all.

We adjust 88's financials in the same manner, except this time we will also adjust the beg.bal for RE's (carried over from 87')

Dont forget so far we have only "restated" (just means we have adjusted) 87's financials (i/s, b/s, stmt of RE) but we're only zooming into the RE's account bc that's the account where we'll get our answer from. Now we will restate 88's financials.

If that still a little blurry, consider the changes must be done individually, per financial statement. 

In other words, changing the numbers for 87's financials, isn't magically going to do the change on the financials post 87.

Here's 88'

................Retainted Earnings (T account)

1/1/88......................cr.XX -->still at old 88' beg bal. from FIFO

...............................cr.$9000--->adjustment = cumulative effect*

NI.............................cr.XX -->changes old to new

12/31/88....................cr.XX -->changes old to new

* the adjustment just brings the old balance up to its new balance (computed under the w/a method). You can certainly look at this adjustement as a sort of "prior period adjustment" because it applied the same way - directly to RE's beginning balance. This adjustment is generally presented net of taxes (or after tax is reduced from the $9000) UNLESS the problem asks we ignore this factor, which it does.

Now we move on to 89'

................Retainted Earnings (T account)

1/1/89.......................cr.XX-->the old 89' from FIFO method

..............dr.($7,000)..........--> adjustment = cumulative effect

NI.............................cr.XX -->changes old to new

12/31/89....................cr.XX -->changes old to new

finally, we get to work in our 1990's financials booklet. This is where we pull our answer from. Keep in mind 1990 is our current year, and that means the financilas have not been issued yet.

So the questions asks, what would the cumulative effect on the stmt of RE be for 1990? and here it goes

................Retainted Earnings (T account)

1/1/90....................cr.XX -->the old one from FIFO method

.............dr.($5000)..........-->adjustment = cumulative effect*

NI..........................cr.XX -->just new**

12/31/90................cr.XX --

*this is the cumulative effect; the answer

** First time NI is computed for 1990, so it is new right off the bat.

------------------------------------------------------------ ---------

furthermore, had there not been any comparative financials presented, the cumulative effect would simply have been the adjustment needed to bring up RE's to its new balance or what it should be today (in the current year) by using the w.a method.

................Retainted Earnings (T account)

1/1/90.......................cr.0 -->the old one from FIFO method

................dr.($5000)........ --> adjustment = cumulative effect

NI.............................cr.XX --> new

12/31/90....................cr.XX --

Although the answer is still the same, the problem would have to specify NO COMPARATIVE STATEMENTS ARE PRESENTED, because when the information given to us the way this example is presented, we automatically understand these are in fact comparative statements.

------------------------------------------------------------ ---------

Similarly, if the problem had stated that only 89' and 90' financial stmts will be presented for comparison we would simply adjust 89's beginning RE to "what it should be" under the w.a menthod. The same goes for 89's beginning RE's.

For comparative financial stmts, the rule states the cummulative effect is the difference between the beginning RE of the first period presented and what the RE would have been if the new principle had been applied to all prior periods. Same ol' story though ...

................Retainted Earnings **FIRST YEAR PRESENTED**

1/1/89.......................cr.XX -->the old one from FIFO method

.................dr.($7000)........ --> adjustment = cumulative effect*

NI.............................cr.XX -->changes old to new

12/31/89....................cr.XX -->changes old to new

* the RE's beginning balance should've been $7,000 lower had the w.a method been used all along, but we didnt. RE is overstated so we make the adjustment just like a prior period adjustement.

................Retainted Earnings (T account) **CURRENT YEAR**

1/1/90.......................cr.XX -->the old one from FIFO method

.................dr.($5000)........ --> adjustment = cumulative effect

NI.............................cr.XX --> new

12/31/90....................cr.XX

Note: because 90's financials have not been issued yet, the adjustment to RE is done through a JE. Because we can no longer add JE to 89', 88' or 87' we restate them. 

JE 

(dr) RE.......................$5,000

.........(cr) Inventory...............$5,000 

hope you guys can find at least some of this useful. I'm still absorbing this material myself, but communicating it in anyway helps make sense of the blurr :)