During 2009 (its first year of operations) and 2010, Batali Foods used the FIFO

Question

During 2009 (its first year of operations) and 2010, Batali Foods used the FIFO inventory costing method for both financial reporting and tax purposes. At the beginning of 2011, Batali decided to change to the average method for both financial reporting and tax purposes.

Income components before income tax for 2011, 2010, and 2009 were as follows ($ in millions)

Revenues           $420 (20011), $390 (2010), $380 (2009)

Cost of goods sold(FIFO) 46             ,    40             , 38

Cost of goods sold(average) 62           ,      56            , 52

Operating expenses               254         , 250               , 242

Dividends of $20 million were paid each year. Batali

Explanation / Answer

Accounting changes are categorized as:

1. Changes in principle (when companies switch from one acceptable accounting method to another)

2. Changes in estimate (when new information causes companies to revise estimates made previously)

3. Changes in reporting entity (the group of companies comprising the reporting entity changes)

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