Sampress, Inc., reported inventory in the 2017 year-end balance sheet, using the

Question

Sampress, Inc., reported inventory in the 2017 year-end balance sheet, using the average cost method, as $342,000. In 2018, the company decided to change its inventory method to FIFO. If the company had used the FIFO method in 2017, ending inventory would have been $367,000. What adjustment would Sampress make for this change in inventory method?

Multiple Choice

A.Debit Inventory for $25,000; Credit Retained earnings for $25,000.

B.Debit Inventory for $367,000; Credit Cost of goods sold for $367,000.

C.Debit Cost of goods sold for $25,000; Credit Inventory for $25,000.

D.No adjustment is necessary

Explanation / Answer

A.) Debit Inventory for $25,000 ($367,000-342,000); Credit Retained earnings for $25,000.

Change in method of Inventory Valuation is a change in Accounting Principle for which adjustments are required. In the given case the method for inventory valuation of 2017 is changed from Average cost to FIFO. Inventory Balance at the year end 2017 is $342,000 as per Average cost method but the inventory balance as per FIFO method would be $367,000. Thus for this adjustment, Inventory needs to be debited with the difference of $25,000 and correspondingly Retained earnings need to be credited with $25,000.

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