ExpertMedium1 markMultiple Choice
CPA · Question 35 · Area III: Select Transactions
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?
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:
A.
Prospectively
B.
Retrospectively
C.
Current period adjustment only
D.
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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