Question

A change in accounting principle that usually should not be reported by revising the financial statements of prior periods is a change from:

a) The weighted-average method to the FIFO method
b) The weighted-average method to the LIFO method
c) FIFO method to the weighted-average method
d) LIFO method to the weighted-average method

Answer 1

A change from the LIFO method to the weighted-average method should be applied retrospectively to retained earnings, without revising prior periods' financial statements, and include proper disclosures.

Step-by-step explanation:

A change from the Last-In, First-Out (LIFO) method to the weighted-average method is an alteration in accounting principle that is typically not reported by revising prior periods’ financial statements. In accounting, changes in principles are often subject to specific rules. According to the Financial Accounting Standards Board (FASB), the change should be applied retrospectively unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. As such, changing from LIFO to the weighted-average method would usually involve adjusting the opening balance of retained earnings for the earliest period presented, but not restating prior periods’ financial statements.

When a company makes this type of accounting principle change, it should include disclosures in the financial statements that identify and describe the change in principle, the method of applying the change, and the effects of the change on affected financial statement line items.