Adams Company Decides at the Beginning of 2011 to Adopt

question 62

Multiple Choice

Adams Company decides at the beginning of 2011 to adopt the FIFO method of inventory valuation. The company had been using the LIFO method for financial and tax reporting since it inception on January 1, 2009. The profit-sharing agreement was in place for all years prior to the year of change, 2011. Payments under this agreement are not an inventoriable cost.
Which of the following statements regarding the accounting for the profit-sharing agreement in connection with the change from LIFO to FIFO is correct?

• A) The effects of the change in accounting principle on the profit-sharing agreement must be treated retrospectively.
• B) The effects of the change in accounting principle on the profit-sharing agreement should be reported only in the period in which the change in accounting principle was made.
• C) It would be impracticable to determine the effect on the profit-sharing agreement as a result of the change in accounting principle.
• D) There would be no effect on the profit-sharing agreement as a result of the change in accounting principle.

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Definitions:

Accounts Receivable

Funds that clients or customers owe to a company for products or services that have been provided but not yet compensated for.

Necessary Cash

The minimum amount of cash required by a company to carry out its day-to-day operations.

Contra Asset Account

An account on a company's balance sheet representing deductions from the gross amount of an asset, such as accumulated depreciation on fixed assets.

Allowance for Doubtful Accounts

An accounting method used to estimate the portion of a company's receivables that may not be collected, reducing the accounts receivable balance accordingly.