In preparation for significant international operations, ABC Co. has adopted a plan to gradually shift to the same accounting methods as used by its international competitors. Part of this plan includes a switch from LIFO inventory accounting to FIFO (recall that IFRS does not allow LIFO). ABC decides to make the switch to FIFO at January 1, 2012. The following data pertains to ABC?s 2012 financial statements.

Sales ??????????....................??. $550

Inventory purchases ??????.............. 350

12/31/12 inventory (using FIFO) ?.......... 580

Compensation expense ???..........??? 17

All sales and purchases were with cash. All of 2012?s compensation expense was paid with cash.

(Ignore taxes.) ABC?s property, plant, and equipment cost $400 and has an estimated useful life of 10 years with no salvage value.

ABC Co. reported the following for fiscal 2011 (in millions of dollars):

Accounting

Prepare ABC?s December 31, 2012, balance sheet and an income statement for the year ended December 31, 2012. In columns beside 2012?s numbers, include 2011?s numbers as they would appear in the 2012 financial statements for comparative purposes.

Analysis

Compute ABC?s inventory turnover for 2011 and 2012 under both LIFO and FIFO. Assume averages are equal to year-end balances where necessary. What causes the differences in this ratio between LIFO and FIFO?

Principles

Briefly explain, in terms of the principles discussed in Chapter 2, why GAAP requires that companies that change accounting methods recast prior year?s financial statement data.

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ABC co. BALANCE SHEET AT DECEMBER 31, 2011 2011 2010 2011 2010 $ 365 $ 200 $ 500 $ 500 Common stock Retained earnings Cash Inventory Property, plant, and equipment Accumulated depreciation 540 500 480 685 400 400 (80) $1,185 (40) $1,040 Total equity Total assets $1,185 $1,040 ABC CO. INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2011 2011 $ 500 (300) (40) (15) $ 145 Sales Cost of goods sold Depreciation expense Compensation expense Net income Summary of Significant Accounting Policies Inventory: The company accounts for inventory by the LIFO method. The current cost of the company's inventory, which approximates FIFO, was $60 and $50 higher at the end of fiscal 2011 and 2010, respectively, than those reported in the balance sheet.