On December 31, 2011, Prince Company appropriately changed to the FIFO cost method from the weighted-average cost method for financial statement and income tax purposes. The change will result in a $700,000 increase in the beginning inventory at January 1, 2011. Assuming a 40 percent income tax rate and that no comparative financial statements for prior years are reported, the cumulative effect of this accounting change reported for the year ended December 31, 2011, is
A) $700,000.
B) $350,000.
C) $420,000.
D) $280,000.

Question

Quizplus · Accepted Answer

The cumulative effect of the accounting change on net income for the year ended December 31, 2011, is $700,000 x (1 - 40%) = $420,000. This amount should be reported as a separate adjustment to beginning retained earnings in the 2011 financial statements.

On December 31, 2011, Prince Company Appropriately Changed to the FIFO