In Year 3, a company changes its inventory method from Weighted Average to FIFO. This is considered a Change in Accounting Principle. How should this be reported?

Answer options:

Prospectively.

Retrospectively, by adjusting the beginning Retained Earnings of the earliest period presented.

As a correction of an error.

By restating the Year 3 opening balance only, without adjusting prior statements.

How to approach this question

Change in Principle -> Retrospective. Change in Estimate -> Prospective. Change in Entity -> Retrospective. Error -> Restatement (Retrospective).

Full Answer

B.Retrospectively, by adjusting the beginning Retained Earnings of the earliest period presented.✓ Correct

A voluntary change in accounting principle is applied retrospectively. The cumulative effect of the change on periods prior to those presented is reflected in the carrying amounts of assets and liabilities and the beginning balance of retained earnings of the earliest period presented.

Common mistakes

Thinking LIFO to FIFO is prospective (it's FIFO to LIFO that is generally prospective because reconstructing LIFO layers is impossible).

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