Reference no: EM131118926

Accounting Change Ramirez Co. decides at the beginning of 2010 to adopt the FIFO method of inventory valuation. Ramirez had used the LIFO method for financial reporting since its inception on January 1, 2008, and had maintained records adequate to apply the FIFO method retrospectively. Ramirez concluded that FIFO is the preferable inventory method because it reflects the current cost of inventory on the balance sheet. The table presents the effects of the change in accounting principle on inventory and cost of goods sold. 


Retained earnings reported under LIFO are as follows: 

Retained Earnings Balance
December 31, 2008 $2,200
December 31, 2009 4,200
December 31, 2010 6,070

Other information:

1. For each year presented, sales are $4,000 and operating expenses are $1,000.

2. Ramirez provides two years of financial statements. Earnings per share information are not required.

(a) Prepare income statements under LIFO and FIFO for 2008, 2009, and 2010.

(b) Prepare income statements reflecting the retrospective application of the accounting change from the LIFO method to the FIFO method for 2010 and 2009.

(c) Prepare the note to the financial statements describing the change in method of inventory valuation. In the note, indicate the income statement line items for 2010 and 2009 that were affected by the change in accounting principle.

(d) Prepare comparative retained earnings statements for 2009 and 2010 under FIFO.