When a Firm Changed Its Method of Accounting for Inventory

question 23

Multiple Choice

When a firm changed its method of accounting for inventory from LIFO to FIFO in 2011, it decided that the 2011 financial statements should be shown comparatively with the 2010 results.
Which of the following statements concerning reporting the change in the retained earnings statement is correct?

• A) No direct change to retained earnings is needed since earnings for both years have been adjusted to reflect the change.
• B) Only the January 1, 2010, retained earnings balance is reported at a different amount to reflect the effects of the change in earnings.
• C) Only the January 1, 2011, retained earnings balance is reported at a different amount to reflect the effects of the change in earnings.
• D) Both the January 1, 2010, and January 1, 2011, retained earnings balances are reported at different amounts to reflect the effects of the change in earnings before those respective dates.

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Definitions:

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File Drawer Effect

A bias in scientific research that results from the tendency to publish only positive or significant findings, while studies with negative or inconclusive results are left unpublished.

Published

The process of making information available to the general public, typically through books, journals, or digital platforms.

Hypothesis

A proposed explanation for a phenomenon, made as a starting point for further investigation.