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Taveras Co. decides at the beginning of 2017 to adopt the FIFO method of inventory valuation. Taveras had used the LIFO method for financial reporting since its inception on January 1, 2015, 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 following table presents the effects of the change in accounting principles on inventory and cost of goods sold. Inventory Determined by Cost of Goods Sold Determined by Date LIFO Method FIFO Method LIFO Method FIFO Method January 1, 2015 \( 0 \) 0 \( 0 \) 0 December 31, 2015 100 80 800 820 December 31, 2016 200 240 1,000 940 December 31, 2017 320 390 1,130 1,100 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 2015, 2016, and 2017. (b) Prepare income statements reflecting the retrospective application of the accounting change from the LIFO method to the FIFO method for 2017 and 2016. (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 2017 and 2016 that were affected by the change in accounting principle. (d) Prepare comparative retained earnings statements for 2016 and 2017 under FIFO. Retained earnings reported under LIFO are as follows: Retained Earnings Balance December 31, 2015 $1,200 December 31, 2016 2,200 December 31, 2017 3,070

Step by step solution

01

Income statement Under LIFO and FIFO

LIFO

	2015	2016	2017
Sales	3,000	3,000	3,000
Less: COGS	-800	-1,000	1,130
Less Operating expenses	-1,000	-1,000	-1,000
Net Income	1,200	1,000	870

FIFO

	2015	2016	2017
Sales	3,000	3,000	3,000
Less: COGS	-820	-940	-1,100
Less Operating expenses	-1,000	-1,000	-1,000
Net Income	1,180	1,060	900

02

Income Statement showing the retrospective effect

	2016	2017
Sales	3,000	3,000
Less: COGS	-1,940	-2,100
Less Operating expenses	-1,000	-1,000
Net Income	60	-100

03

Notes to Income Statement

	2017	2016
Income Statement	LIFO	FIFO	Difference	LIFO	FIFO	Difference
COGS	1,130	1,100	30	1,000	940	60
Net Income	870	900	30	1,000	1,060	60

04

Comparative retained earnings statement

	2016	2017
Retained earnings, Jan 1	1,200
adjustment for change of method	-20
Retained Earnings, Jan 1 as adjusted	1,180	1,240
Net income/(loss)	60	-100
Retained Earnings, Dec 31	1,240	1,140

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