Holder-Webb Company began operations on January 1, 2018, and uses the average-cost method of pricing inventory. Management is contemplating a change in inventory methods for 2021. The following information is available for the years 2018–2020.   Net Income Computed Using   Average-Cost Method FIFO Method LIFO Method 2018 $15,000 $19,000 $12,000 2019   18,000   23,000   14,000 2020   20,000   25,000   17,000 Instructions (Ignore all tax effects.) a.    Prepare the journal entry necessary to record a change from the average-cost method to the FIFO method in 2021. b.    Determine net income to be reported for 2018, 2019, and 2020, after giving effect to the change in accounting principle. c.    Assume Holder-Webb Company used the LIFO method instead of the average-cost method during the years 2018–2020. In 2021, Holder-Webb changed to the FIFO method. Prepare the journal entry necessary to record the change in principle.

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A: a.

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A:

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Inventory Valuation

Before discussing the topic inventory valuation let’s discuss the meaning of inventory. In accounting, inventory is also known as stock. Inventory means all the finished goods, materials, merchandise that a business holds for the purpose of selling it in the market with the motive of earning profit.