Question

Wade Corporation has been your audit client for several years. At the beginning of the current year, the company changed its method of inventory valuation from average cost to last in, first out (LIFO). The change, which had been under consideration for some time, was in your opinion a logical and proper step for the company to take. What effect, if any, will this situation have on your audit report for the current year?

Answer 1

Change in accounting principle

Change method of inventory costing.

A change from one generally accepted accounting principle to another. Examples include:

Ø Average cost to LIFO.

Effects of a Change 1. Direct Effects: The direct effects of a change in accounting principle are adjustments that would be necessary to restate the financial statements of prior periods. The FASB takes the position that companies should retrospectively apply the direct effects of a change in accounting principle.

Retrospective Accounting Change Approach Changes in Accounting Principle Company reporting the change 1) adjusts its financial statements for each prior period presented to the same basis as the new accounting principle.

It change the inventory amounts in prior periods

2) adjusts the carrying amounts of assets and liabilities as of the beginning of the first year presented, plus the opening balance of retained earnings.

Reporting a Change in Principle Changes in Accounting Principle

Major disclosure requirements are as follows. 1. Nature and reason for the change in accounting principle. 2. The method of applying the change, and: a. A description of the prior-period information that has been retrospectively adjusted, if any. b. The effect of the change on income from continuing operations, net income, any other affected line items. c. The cumulative effect of the change on retained earnings or other components of equity or net assets as of the beginning of the earliest period presented