Answer:
Flay Foods
A Change in Accounting Principle, from FIFO to LIFO:
1. Journal entry at the beginning of 2021 to record the change in accounting principle (ignoring income taxes):
Debit Retained Earnings $7 million
Credit Ending Inventory $7 million
To record the change from FIFO to LIFO.
3. Amounts Flay will report for net income in its 2019 to 2021 comparative income statements:
2019 2020 2021
Net Income $78 $80 $76
Less Cost of goods sold understated ($7)
Add Beginning inventory overstated ($7)
Modified Net Income $78 $73 $83
Explanation:
A change in principle (e.g. inventory valuation method) requires the company to retrospectively apply the change to all prior reporting periods, as if the new principle had always been in place, unless it is impractical to do so. Going from the above requirement, the 2018 and 2019 net income needed to be restated as a result of this change in accounting principle. However, this is not practical from the information given.
The valuation of inventory impact on the Cost of goods sold and the profits differently, depending on the inventory method used.
FIFO stands for “First-In, First-Out.” It is a method used for cost flow assumption purposes in the cost of goods sold calculation. The FIFO method assumes that the oldest products in a company's inventory have been sold first.
LIFO stands for "First-In, First-Out." The LIFO method assumes that the newest products in a company's inventory have to be sold first, instead of the oldest. This is not practical in real life. But, the LIFO method has some advantage during inflation, with rising costs.
