I don't get it, why is the difference in income in the second year is equal to the $20,000 difference between the FIFO inventory change and the LIFO inventory change? I feel that I am lacking a mental capacity necessary to understand this problem as well as many other ones from gleim
The Hastings Company began operations on January 1, Year 1 and uses the FIFO method in costing its raw material inventory. Management is contemplating a change to the LIFO method and is interested in determining what effect such a change will have on net income. Accordingly, the following information has been developed:
Final Inventory
Year 1
Year 2
FIFO
$240,000
$270,000
LIFO
200,000
210,000
Net income per FIFO
$120,000
$170,000
Based upon the above information, a change to the LIFO method in Year 2 results in net income for Year 2 of
A. $170,000
B. $110,000
C. $230,000
D. $150,000
Answer (D) is correct.
A change in accounting principle requires retrospective application. All periods reported must be individually adjusted for the period specific effects of applying the new principle. The difference in income in the second year is equal to the $20,000 difference between the FIFO inventory change and the LIFO inventory change (FIFO: $270,000 – $240,000 = $30,000 change; LIFO: $210,000 – $200,000 = $10,000 change; $30,000 – $10,000 = $20,000 difference). The $170,000 FIFO net income will decrease by $20,000. Net LIFO income will therefore be $150,000 ($170,000 – $20,000).
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