Question

Fox has used the FIFO method of inventory valuation since it began operations in 20x6. Fox decided to change to the weighted-average method for determining inventory costs at the beginning of 20x9. The following schedule shows year-end inventory balances under the FIFO and weighted-average methods: Year FIFO Weighted-average 20x6 $45,000 $54,000 20x7 78,000 71,000 20x8 83,000 78,000 What amount, before income taxes, should be reported in the 20x9 retained earnings statement as the cumulative effect of the change in accounting principle?

Answer 1

Answer:$3000 to be subtracted from retain earnings

Explanation:

The. change in method of valuation of stock is a change in accounting policy which will have a retrospective effect from the year the change take place that is applied to transactions as if it has always been in use unless it not possible to determine the past effects of the change.

From the above scenario the closing stock was valued at $45,000 instead of $54,000 this is undervaluation of closing stock which means the profit was understated by $9000 and to correct will add $9000 to retained earnings.

in 2007 the closing stock was valued as $78,000 instead of $71,000 this means stock was overvalued by $7000 and profit overstated by $7000 to correct will subtract $7000 from retained earnings.

In 2008 closing stock was valued at $83,000 instead of $78,000 this means closing stock was overvalued by $5000 and profit overstated by $5000, to correct subtract $5000 from retained earnings.

Cummulatively it's $9000-$7000-$5000=- $3000