(Accounting Change) Taveras Co. decides at the beginning of 2007 to adopt the FIFO method of inventory valuation. Taveras had used the LIFO method for financial reporting since its inception on January 1, 2005, and had maintained records adequate to apply the FIFO method retrospectively. Taveras concluded that FIFO is the preferable inventory method because it reflects the current cost of inventory on the balance sheet. The table on page 1191 presents the effects of the change in accounting principles on inventory and cost of goods sold.

Other information:
1. For each year presented, sales are $3,000 and operating expenses are $1,000.
2. Taveras provides two years of financial statements. Earnings per share information is not required.
Instructions

(a) Prepare income statements under LIFO and FIFO for 2005, 2006, and 2007.

(b) Prepare income statements reflecting the retrospective application of the accounting change from the LIFO method to the FIFO method for 2007 and 2006.

(c) Prepare the note to the financial statements describing the change in method of inventory valuation.
In the note, indicate the income statement line items for 2007 and 2006 that were affected by the change in accounting principle.

(d) Prepare comparative retained earnings statements for 2006 and 2007 under FIFO. Retained earnings reported under LIFO are as follows:

Transcribed Image Text:

Inventory Determined by Cost of Goods Sold Determined by Date January 1, 2005 LIFO Method FIFO Method LIFO Method FIFO Method $ 0 December 31, 2005 100 $ 0 80 $ 0 $ 0 800 820 December 31, 2006 200 240 1,000 940 December 31, 2007 320 390 1.130 1,100