Question

In year 2, Sammi Corp. changes its inventory method from FIFO to the weighted-average method. Under the weighted-average method, the year 2 beginning inventory is $3,000 higher than the FIFO method. The financial statements are revised using the retrospective approach. What are the financial statement effects of the change in accounting principle? (Select all that apply.)

Answer 1

Answer:

Two adjustments must be made to year 1's financial statements:

1. The income statement must be adjusted since net income increased because cost of goods sold decreased.
2. The balance sheet must be adjusted since retained earnings will increase because net income increased.

Explanation:

The retrospective approach hides any changes with the accounting methods, and shows the financial statements as if the new accounting method was used all along and there was no error or change.