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E22 3

The document summarizes Ramirez Co.'s income statements for 2013-2015 under both average cost and FIFO methods of inventory valuation. In 2015, the company changed its inventory valuation method from average cost to FIFO retrospectively. This resulted in increases to inventory, retained earnings and net income of $70, $70 and $30 in 2015 and $40, $40 and $60 in 2014 respectively. The retrospective application adjustment to retained earnings as of January 1, 2014 was $20.

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1K views2 pages

E22 3

The document summarizes Ramirez Co.'s income statements for 2013-2015 under both average cost and FIFO methods of inventory valuation. In 2015, the company changed its inventory valuation method from average cost to FIFO retrospectively. This resulted in increases to inventory, retained earnings and net income of $70, $70 and $30 in 2015 and $40, $40 and $60 in 2014 respectively. The retrospective application adjustment to retained earnings as of January 1, 2014 was $20.

Uploaded by

bella
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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a. RAMIREZ CO.

Income Statement
For the Year Ended December 31
Average Cost
2013 2014 2015
Sales $ 4.000 $ 4.000 $ 4.000
Cost of goods sold $ 800 $ 1.000 $ 1.130
Operating expenses $ 1.000 $ 1.000 $ 1.000
Net income $ 2.200 $ 2.000 $ 1.870

RAMIREZ CO.
Income Statement
For the Year Ended December 31
FIFO
2013 2014 2015
Sales $ 4.000 $ 4.000 $ 4.000
Cost of goods sold $ 820 $ 940 $ 1.100
Operating expenses $ 1.000 $ 1.000 $ 1.000
Net income $ 2.180 $ 2.060 $ 1.900
b. RAMIREZ CO.
Income Statement
For the Year Ended December 31
2014 2015
As adjusted (Note A)
Sales $ 4.000 $ 4.000
Cost of goods sold $ 1.100 $ 940
Operating expenses $ 1.000 $ 1.000
Net income $ 1.900 $ 2.060

c. Note A:
Change in Method of Accounting for Inventory Valuation
On January 1, 2015, Ramirez Co. elected to change its method of valuing its inventory to the FIFO
method; in all prior years inventory was valued using the average-cost method. The company adopted
the new method of accounting for inventory to better report cost of goods sold in the year incurred.
Comparative financial statements of prior years have been adjusted to apply the new method
retrospectively. The following financial statement line items for years 2015 and 2014 were affected
by the change in accounting policy.

2015 2014
Statement of Financial Position Average FIFO Difference Average FIFO Difference
Inventory $ 320 $ 390 $ 70 $ 200 $ 240 $ 40
Retained Earnings $ 6.070 $ 6.140 $ 70 $ 4.200 $ 4.240 $ 40

Income Statement
Cost of Goods Sold $ 1.130 $ 1.100 $ 30 $ 1.000 $ 940 $ 60
Net Income $ 1.870 $ 1.900 $ 30 $ 2.000 $ 2.060 $ 60

Statement of Cash Flows


(no effect)

d. Retained earnings statements after retrospective application.


2015 2014
Retained earnings, January 1, as reported $ 2.200
Less: *Adjustment for the cummulative effect on
prior years of applying retrospectively the new
accounting method of accounting inventory $ 20
Retained earnings, January 1, as adjusted $ 4.240 $ 2.180
Net Income $ 1.900 $ 2.060
Retained earnings, December 31 $ 6.140 $ 4.240

* Net income Jan 1, 2014 FIFO - Net income Jan 1, 2014 Average
$2,180 - $2,200 = ($20)

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