Royal Inc. began operations on January 1, 2015, and uses the FIFO method of pric

Question

Royal Inc. began operations on January 1, 2015, and uses the FIFO method of pricing inventory Management is contemplating a change to Average-Cost method for 2018. The following information is available for the years 2015-2017. Ignore income tax. Net Income Computed Using: FIFO Method $120,000 80,000 165,000 Average-Cost Method 2015 $105,000 2016 70,000 2017 150,000 20. The cumulative effect of this accounting change on beginning retained earnings in 2018 is a. $60,200. b. $40,000. c. $15,000. d. $12,800. 21. The net income for 2017 on comparative financial statements issued in 2018 is a. $60,200. b. $70,000. c. $150,000. d. $165,000

Explanation / Answer

A change in the method of Inventory valuation has to be applied retrospectively

20.

Cumulative effect on retained earnings = 40,000

21.

Net income for 2017 = Net income as per Average cost method

Net Income = 150,000

Year Average cost method FIFO method   Increase/decrease 2015 105,000 120,000 (15,000) 2016 70,000 80,000 (10,000) 2017 150,000 165,000 (15,000) (40,000)

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