On December 31, Year 10, Brown Company changed its inventory valuation method from the weighted-average method to FIFO for financial statement purposes. The change will result in an $800,000 decrease in the beginning inventory at January 1, Year 10. The tax rate is 30%. The cumulative effect of this accounting change for the year ended December 31, Year 10, in the statement of retained earnings is:

Question

Business

Cornelius Wilkinson

25 September, 05:42

On December 31, Year 10, Brown Company changed its inventory valuation method from the weighted-average method to FIFO for financial statement purposes. The change will result in an $800,000 decrease in the beginning inventory at January 1, Year 10. The tax rate is 30%. The cumulative effect of this accounting change for the year ended December 31, Year 10, in the statement of retained earnings is:

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Answers (1)

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Maxim Hurley · Answer 1

Answer: Overstatement of profit by $8000

Explanation:

The change in an accounting method of valuing stock which results in decrease in the value of stock will increase the profit when compared to the period before the method that decrease the stock was used. To effect the change a debit charge will be made to the retained earnings and a credit charge to the stock account to reduce the value.