Welsh, Inc. began operations January 1, 2021. During 2023, management changed its method of accounting for inventories from the average-cost method to the first-in, first-out (FIFO) method. This change is effective as of January 1, 2023. If cost of goods sold had been determined under each of these two methods for all years of operation, the results would have been:

The company’s income statements as reported under average cost before implementing the accounting change for 2023, 2022, and 2021 follow. The income tax rate for Welsh is 40%. Welsh will continue to use average cost for income tax reporting.

Required

a. Prepare the comparative income statements for Welsh after the change to FIFO.

b. Determine the after-tax cumulative effect in the retained earnings balance for the first balance sheet presented (i.e., at December 31, 2022). Welsh presents comparative balance sheets.

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Cost of Goods Sold Average cost FIFO 2023 $142,500 90,000 2022 $120,000 72,000 2021 $129,000 78,000