Method of Inventory: Inventory refers to the current assets that a company expects to sell during the normal course of business operations, the goods that are under process to be completed for future sale, or currently used for producing goods to be sold in the market. Inventory is valued under three methods:
FIFO: Under this inventory method, the units that are purchased first, are sold first. Thus, it starts from the selling of the beginning inventory, followed by the units purchased in a chronological order of their purchases took place during a particular period.
LIFO: Under this inventory method, the units that are purchased last, are sold first. Thus, it starts from the selling of the units recently purchased and ending with the beginning inventory.
Average cost method: Under this method, the cost of the goods available for sale is divided by the number of units available for sale during a particular period.
To Explain: the difference in the accounting treatment of a change to the LIFO inventory method from other inventory method changes.
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Chapter 9 Solutions
INTERMEDIATE ACCOUNTING
- How long does it take an inventory error affecting ending inventory to correct itself in the financial statements? Explain.arrow_forwardHow do the perpetual and periodic inventory accounting systems differ from each other?arrow_forwardWhat are the exceptions to historical cost valuation of inventory allowed under generally accepted accounting principles?arrow_forward
- Which of the following financial statements would be impacted by a current-year ending inventory error, when using a periodic inventory updating system? A. balance sheet B. income statement C. neither statement D. both statementsarrow_forwardIf the net realizable of an entity's inventories is less than its cost, the entry to adjust the balance of the inventory assuming the entity uses the allowance method will involve a A. Debit to inventory B. Debit to loss on inventory write-down C. Credit to inventory. D. Credit to loss on inventory write-downarrow_forwardAccess the FASB Accounting Standards Codification at the FASB website ( asc.fasb.org ). Determine the specific citation for accounting for each of the following items: 1. Reporting most changes in accounting principle. 2. Disclosure requirements for a change in accounting principle. 3. Illustration of the application of a retrospective change in the method of accounting for inventory.arrow_forward
- Generally accepted accounting principles should be applied consistently from period to period. However, changeswithin a company, as well as changes in the external economic environment, may force a company to change anaccounting method. The specific reporting requirements when a company changes from one generally acceptedinventory method to another depend on the methods involved.Required:Explain the accounting treatment for a change in inventory method (a) not involving LIFO, (b) from the LIFOmethod, and (c) to the LIFO method. Explain the logic underlying those treatments. Also, describe how disclosurerequirements are designed to address the departure from consistency and comparability of changes in accountingprinciplearrow_forwardDo you agree with the following statements? Express your opinion on each statement. An inventory error that causes an understatement (or overstatement) for net income in one accounting period, if not corrected, will cause an overstatement (or understatement) in the next. Since an understatement (overstatement) of one period offsets the overstatement (understatement) in the next, such errors are said to correct themselves. Market usually means replacement cost of inventory when applied in the LCM. Cost of goods available for sale equals ending inventory plus cost of sales.arrow_forward
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