E22 3
E22 3
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
* Net income Jan 1, 2014 FIFO - Net income Jan 1, 2014 Average
$2,180 - $2,200 = ($20)