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:
What amount, before income taxes, should be reported in the 1990 retained earnings statement as the cumulative effect of the change in accounting principle?
Choice 'a' is correct. $5,000 decrease.
The cumulative effect of change in accounting principle is determined as of the beginning of the year of change if comparative financial statements are not presented. In this case, the year of change is 1990, so the cumulative effect is the difference in inventory as of the end of 1989. [Note that inventory is a balance sheet item, so the change is based on the balances at the end of the last year the prior method was used. Had this question shown annual income statement amounts of cost of goods sold, we would have had to look at all the past years in the aggregate.] This will allow us to arrive at the adjustment to obtain the amount of retained earnings that would have been reported at the beginning of the period of change if the new accounting principle had been used for all prior periods.
A statement of cash flows for a development stage enterprise:
Rule: Development stage enterprises should present financial statements in accordance with GAAP and make additional disclosures such as cumulative amounts from inception for: net losses, deficits, sales, expenses, and cash flows and supplementary data.
Choice 'a' is correct, per the rule shown above.
Choice 'b' is incorrect. Current amounts are shown as well as cumulative amounts.
Choice 'c' is incorrect. Cumulative amounts from inception are shown.
Choice 'd' is incorrect. A statement of cash flows is required.
The following information pertains to Aria Corp. and its divisions for the year ended December 31, 1988:
Aria and all of its divisions are engaged solely in manufacturing operations. Aria has a reportable segment if that segment's revenue exceeds:
Choice 'b' is correct. $260,000 represents a reportable segment (10% of total sales):
Rule: To be significant enough to report on, a segment must be at least 10% of:
1. Combined revenues (whether intersegment or unaffiliated customers), or
2. Operating income, or
3. Identifiable assets.
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with Quo's president and outside accountants, made changes in accounting policies, corrected several errors dating from 1992 and before, and instituted new accounting policies.
Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.
This question represents one of Quo's transactions. List A represents possible clarifications of these transactions as: a change in accounting principle, a change in accounting estimate, a correction of an error in previously presented financial statements, or neither an accounting change nor an accounting error.
Item to Be Answered
Quo changed from FIFO to average cost to account for its raw materials and work in process inventories.
List A (Select one)
Choice 'a' is correct. Change in inventory pricing method from FIFO to average cost is a change in accounting principle.
During 1994, Orca Corp. decided to change from the FIFO method of inventory valuation to the weightedaverage method. Inventory balances under each method were as follows:
Orca's income tax rate is 30%.
Orca should report the cumulative effect of this accounting change as a(n):
Choice 'a' is correct. The cumulative effect of a change in accounting principle is shown as an adjustment to beginning retained earnings.
Choice 'b' is incorrect. The cumulative effect of a change in accounting principle is now presented as a separate category on the retained earnings statement and is not a component of net income.
Choice 'c' is incorrect. Extraordinary items are unusual and infrequent in nature. Extraordinary items have nothing to do with changes in accounting principle.
Choice 'd' is incorrect. A change in accounting principle affects retained earnings, not the income statement, under SFAS No. 154.
