When a Firm Changed Its Method of Accounting for Inventory

question 37

Multiple Choice

When a firm changed its method of accounting for inventory from LIFO to FIFO in 2014,it decided that the 2014 financial statements should be shown comparatively with the 2013 results. Which of the following statements concerning reporting the change in the retained earnings statement is correct?

• A) Both the January 1,2013,and January 1,2014,retained earnings balances are reported at different amounts to reflect the effects of the change in earnings before those respective dates.
• B) Only the January 1,2013,retained earnings balance is reported at a different amount to reflect the effects of the change in earnings.
• C) Only the January 1,2014,retained earnings balance is reported at a different amount to reflect the effects of the change in earnings.
• D) No direct change to retained earnings is needed since earnings for both years have been adjusted to reflect the change.

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Definitions:

Average Cost

The total cost divided by the number of units produced, indicating the cost per unit of output.

Marginal Cost

The increase in total cost that arises from an extra unit of production, pivotal for decision-making in production processes.

Diminishing Returns

A principle stating that as more of a variable input is combined with a fixed input, the incremental gains in output will eventually decrease.

Increasing Returns

This refers to a scenario in economics where, as the quantity of input increases, the rate of output increases at a faster rate, leading to economies of scale.