A company changes its inventory method from LIFO to FIFO. How should this change be reported?

Answer options:

Retrospectively, by adjusting prior period financial statements

Prospectively, affecting only current and future years

As a cumulative effect of change in accounting principle in current Net Income

As a correction of an error

How to approach this question

Change in Principle (e.g., LIFO to FIFO) -> Retrospective. <br/>Exception: Change TO LIFO is often Prospective if past data is unavailable. But LIFO to FIFO is Retrospective.

Full Answer

A.Retrospectively, by adjusting prior period financial statements✓ Correct

A change in accounting principle (like LIFO to FIFO) requires retrospective application to all prior periods presented, unless it is impracticable to do so.

Common mistakes

Confusing with Change in Estimate (Prospective).

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