During 2014 (its first year of operations) and 2015, Batali Foods used the FIFO

Question

During 2014 (its first year of operations) and 2015, Batali Foods used the FIFO inventory costing method for both financial reporting and tax purposes. At the beginning of 2016, Batali decided to change to the average method for both financial reporting and tax purposes. Income components before income tax for 2016, 2015, and 2014 were as follows ($ in millions): Prepare the journal entry at the beginning of 2016 to record the change in accounting principle. (Ignore income taxes.) Prepare the 2016-2015 comparative income statements. Determine the balance in retained earnings at January 1, 2015, as Batali reported previously using the FIFO method. Determine the adjustment to the January 1,2015, balance in retained earnings that Batali would include in the 2016-2015 comparative statements of retained earnings or retained earnings column of the statements of shareholders' equity to revise it to the amount it would have been if Batali had used die average method.

Explanation / Answer

Answer 1:

$ in millions

Answer 2:

Answer 3

Answer 4:

2016 2015 2014 Revenue            420            390            380 Cost of goods sold (FIFO)            (46)            (40)            (38) Cost of goods sold (Average)            (62)            (56)            (52) Operating expenses          (254)          (250)          (242) Profit using FIFO method            120            100            100 Profit using Average method            104               84               86

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