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Flay Foods has always used the FIFO inventory costing method for both financial reporting and tax purposes. At the beginning of 2021, Flay decided to change to the LIFO method. As a result of the change, net income in 2021 was $87 million. If the company had used LIFO in 2020, its cost of goods sold would have been higher by $5 million that year. Flaya€™s records of inventory purchases and sales are not available for 2019 and several previous years. Last year, Flay reported the following net income amounts in its comparative income statements:

($ in millions) 2018 2019 2020
Net income $87 $89 $91

Required:
a. Prepare the journal entry at the beginning of 2021 to record the change in accounting principle. (Ignore income taxes.)
b. Briefly describe other steps Flay will take to report the change.
c. What amounts will Flay report for net income in its 2013–2019 comparative income statements?

Respuesta :

anthougo

Answer:

Flay Foods

a. Journal Entry:

January 2021

Debit Retained Earnings $5 million

Credit Income Summary (Cost of goods sold) $5 million

To record the increased cost of goods sold.

b. Flay will take the following steps to report the change in accounting principle:

1. Retrospectively restate the Cost of goods sold, increasing it by $5 million.

2. Reflect the reduction in Retained Earnings at the beginning of 2021.

3. Disclose the nature of this change and the reason for the change in the footnote to the financial statements of 2020.

4. Disclose its inability to reflect the change in accounting for other comparative financial statements other than 2020's.

c. The amounts that Flay will report for net income in its 2018 to 2019 comparative income statements are:

($ in millions)             2018    2019

Net income                 $87     $89

Explanation:

a) Data and Calculations:

2021 Net Income, based on LIFO = $87 million

2020 Cost of goods sold, based on LIFO = $5 million higher

This would have reduced the Net income by $5 million

2020 Net income amounts in its comparative income statements:

($ in millions)             2018    2019   2020

Net income                 $87     $89      $91

Restatement:

Cost of goods sold                               (5)

Restated net income $87     $89     $86

b) A change in an Accounting Principle is applied retrospectively in the financial statements.  This means that Flay must adjust all comparative amounts affected by the change in accounting policy for each prior period's financial statements presented if it is possible.  It looks that the possibility for restatement is only limited to 2020 since Flay's records of inventory purchases and sales for previous years were not made available.

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