In Year 2, a company changes its inventory method from LIFO to FIFO. This is considered a change in accounting principle. How should this change be reported?

Answer options:

Prospectively

Retrospectively

Current period adjustment only

As a correction of an error

How to approach this question

Identify type of change. Principle (LIFO to FIFO) -> Retrospective. Estimate (Depreciation life) -> Prospective. Entity -> Retrospective.

Full Answer

B.Retrospectively✓ Correct

A change in accounting principle is applied retrospectively. Prior financial statements are restated, and the cumulative effect on beginning retained earnings of the earliest period presented is recorded.

Common mistakes

Confusing principle change with estimate change (e.g., changing depreciation method is now treated as change in estimate, but inventory method is principle).

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