Kyto Electronics decides to adopt the average cost method of inventory valuation at the beginning of 2020. Kyto had used the LIFO method for financial reporting since its inception on January 1, 2018, and had maintained records adequate to apply the average-cost method retrospectively. Kyto concluded that average-cost is the preferable inventory method because extreme effects of FIFO or LIFO on the income statement and balance sheet are averaged. The following table presents the effects of the change in accounting principles on inventory and cost of goods sold for each year: Other information: 1. 2. 3. 2018 2019 2020 Instructions (a) Prepare income statements under LIFO and average-cost for 2018, 2019, and 2020. For each year presented, sales are $15,000 and operating expenses are $2,500. Kyto provides 2 years of financial statements, and earnings per share information is not required. Ignore income taxes. 2018 2019 2020 LIFO 2,000 3,000 3,500 $2,500 4,500 6,000 Inventory Determined by Average-Cost 3,000 5,000 6,000 Cost of Goods Sold Determined by (b) Prepare comparative retained earnings statements for 2020 and 2019 under the average-cost method. Retained earnings reported under LIFO are as follows: Retained Earnings Balance LIFO 10,000 10,500 11,000 Average-Cost 9,000 9,500 10,500
Kyto Electronics decides to adopt the average cost method of inventory valuation at the beginning of 2020. Kyto had used the LIFO method for financial reporting since its inception on January 1, 2018, and had maintained records adequate to apply the average-cost method retrospectively. Kyto concluded that average-cost is the preferable inventory method because extreme effects of FIFO or LIFO on the income statement and balance sheet are averaged. The following table presents the effects of the change in accounting principles on inventory and cost of goods sold for each year: Other information: 1. 2. 3. 2018 2019 2020 Instructions (a) Prepare income statements under LIFO and average-cost for 2018, 2019, and 2020. For each year presented, sales are $15,000 and operating expenses are $2,500. Kyto provides 2 years of financial statements, and earnings per share information is not required. Ignore income taxes. 2018 2019 2020 LIFO 2,000 3,000 3,500 $2,500 4,500 6,000 Inventory Determined by Average-Cost 3,000 5,000 6,000 Cost of Goods Sold Determined by (b) Prepare comparative retained earnings statements for 2020 and 2019 under the average-cost method. Retained earnings reported under LIFO are as follows: Retained Earnings Balance LIFO 10,000 10,500 11,000 Average-Cost 9,000 9,500 10,500
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Problem 3
Kyto Electronics decides to adopt the average cost method of inventory
valuation at the beginning of 2020. Kyto had used the LIFO method for
financial reporting since its inception on January 1, 2018, and had
maintained records adequate to apply the average-cost method
retrospectively. Kyto concluded that average-cost is the preferable
inventory method because extreme effects of FIFO or LIFO on the
income statement and balance sheet are averaged. The following table
presents the effects of the change in accounting principles on inventory
and cost of goods sold for each year:
Other information:
1.
2.
3.
2018
2019
2020
Instructions
(a) Prepare income statements under LIFO and average-cost for 2018, 2019, and 2020.
For each year presented, sales are $15,000 and operating expenses are $2,500.
Kyto provides 2 years of financial statements, and earnings per share information is not required.
Ignore income taxes.
2018
2019
2020
LIFO
2,000
3,000
3,500
$2,500
4,500
6,000
Inventory Determined by
Average-Cost
3,000
5,000
6,000
Cost of Goods Sold Determined by
(b) Prepare comparative retained earnings statements for 2020 and 2019 under the average-cost method. Retained earnings reported under LIFO are as follows:
Retained Earnings Balance
LIFO
10,000
10,500
11,000
Average-Cost
9,000
9,500
10,500
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