Question

Blago Wholesale Company began operations on January 1, 2017, and uses the average cost method in costing its inventory. Management is contemplating a change to the FIFO method in 2018 and is interested in determining how such a change will affect net income. Accordingly, the following information has been developed:

	2017		2018
Final inventory:
Average cost	$	150,000	$	255,000
FIFO		160,000		270,000

Condensed income statements for Blago Wholesale appear below:

	2017		2018
Sales	$	1,000,000	$	1,200,000
Cost of goods sold		600,000		720,000
Gross profit		400,000		480,000
Selling, general, and administrative		250,000		275,000
Net income	$	150,000	$	205,000

Required:

Based on this information, what would 2018 net income be after the change to the FIFO method? Ignore any income tax effects of this change in accounting method.

Sales for 2017 and 2018?

Cost of Goods Sold for 2017 and 2018?

Gross Profit for 2017 and 2018?

Selling, general, and administrative for 2017 and 2018?

Net income for 2017 and 2018?

Answer 1

Solution:-

Change in inventory valuation is referred to be change in accounting policy..

Changes in accounting policies and corrections of errors are generally retrospectively accounted for, whereas changes in accounting estimates are generally accounted for on a prospective basis. Therefore Change in inventory valuation should be retrospectively.