During 2015, Crop-Paper-Scissors, a craft store, changed to the LIFO inventory c

Question

During 2015, Crop-Paper-Scissors, a craft store, changed to the LIFO inventory costing method of accounting for inventory. Suppose that during 2016, Crop-Paper- Scissors switches back to FIFO inventory costing method and the following year switches back to LIFO again. 1. What would you think of a company's ethics if it changed accounting methods every year? 2. What accounting principle would changing methods every year violate? 3. Who can be harmed when a company changes its accounting methods too often? How?

Explanation / Answer

Question 1. What would you think of a company’s ethics if it changed accounting methods every year?

Question 2: What accounting principle would changing methods every year violate?

Changing accounting methods, policies, principles frequently violates Consistency principle of accounting. Consistency principle states the accounting methods, policies, principles should be followed consistently over the periods unless there is a necessity for improvement in presentation of financial statements. If changing accounting methods affects materially the information presented in the financial statements, it must be duly approved by the auditor and the material changes must be clearly disclosed in the financial statements. And new method should be followed consistently followed over the periods.

Question 3: Who can be harmed when a company changes its accounting methods too often?

If a company changes its accounting methods too often, the values mentioned in the financial statements will not be comparable and reliable.

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