Question

Problem 5-1 Reporting a change in accounting principle (LO 5-1)

Barden, Inc., operates a retail chain that specializes in baby clothes and accessories that are made to its specifications by a number of overseas manufacturers. Barden began operations 20 years ago and has always employed the FIFO method to value its inventory. Since Barden’s inception, prices have generally declined as a result of intense competition among Barden’s suppliers. In 20X0, however, prices began to rise significantly as these suppliers succumbed to international pressure and addressed sweatshop conditions in their factories. The improved working conditions and benefits led to increased costs that are being passed on to Barden. In turn, Barden’s management believes that FIFO no longer is the best method to value its inventories and thus switched to LIFO on January 1, 20X1. This accounting change was justified because of LIFO’s better matching of current costs with current revenues. Barden judges it impractical to apply the LIFO method on a retrospective basis because the company never maintained records on a LIFO basis. As a result of the change, ending 20X1 inventory was reported at $275,000 instead of its $345,000 FIFO value. Barden reported 20X1 net income of $825,000. Ignore income taxes and the EPS disclosure.

Required:

1. How should Barden’s 20X1 comparative financial statements reflect this change in accounting principle?

2. Prepare whatever disclosure is required under current GAAP as a result of this change.

Answer 1

page-01 = $ 70000 a result Answer Required: 0) How should Barden's 20x1 comparative financial statements steffect this change accounting principle. changes: closing inventory valued at $2 45000 net profit reported : $ 825000 shall be ferthwy reduced by giving effect of change in method ($345000-$275000) hence net profit will be = $755000. (2) prepare what ever disclosure is required under current GAAP as of this change disclosure - For valuation & Inventories, company has switched to [IFO method from earlic method of FLFO → As change is effected retrospectively as per GAAP. as such changes accordated' due to its proper accounting and true and fair view of the financial statement → Effects for changes has passed on through p and L account → Current As per accounting policy company will follow LIFO method for valuation 4 inventories.