On December 1, 2009, LCD Distributing Company ("LCD" or "Company") issued a press release announcing its financial results for the fiscal year ended November 30, 2009. Included was the following information regarding a change in inventory method (in part):
In the fourth quarter of fiscal 2009, the Company changed its inventory valuation method from the Last-In First-Out (LIFO) method to the First-In First-Out (FIFO) method. The change is preferable as it provides a more meaningful presentation of the Company's financial position as it values inventory in a manner which more closely approximates current cost; better represents the underlying commercial substance of selling the oldest products first; and more accurately reflects the Company's realized periodic income.
As required by U.S. generally accepted accounting principles, this change in accounting principle has been reflected in the consolidated statements of financial position, consolidated statements of operations, and consolidated statements of cash flows through retroactive application of the FIFO method. Previously reported net income (loss) available to common shareholders' for the fiscal years 2009 and 2008 were increased by $0.4 million and $2 million after income taxes, respectively.
Required:
1. Why does GAAP require LCD to retrospectively adjust prior years' financial statements for this type of accounting change?
2. Assuming that the quantity of inventory remained stable during 2008, did the cost of LCD's inventory move up or down during that period?

Question

Quizplus · Accepted Answer

The Answer of On December 1, 2009, LCD Distributing Company ("LCD" or "Company") issued a press release announcing its financial results for the fiscal year ended November 30, 2009. Included was the following information regarding a change in inventory method (in part):
In the fourth quarter of fiscal 2009, the Company changed its inventory valuation method from the Last-In First-Out (LIFO) method to the First-In First-Out (FIFO) method. The change is preferable as it provides a more meaningful presentation of the Company's financial position as it values inventory in a manner which more closely approximates current cost; better represents the underlying commercial substance of selling the oldest products first; and more accurately reflects the Company's realized periodic income.
As required by U.S. generally accepted accounting principles, this change in accounting principle has been reflected in the consolidated statements of financial position, consolidated statements of operations, and consolidated statements of cash flows through retroactive application of the FIFO method. Previously reported net income (loss) available to common shareholders' for the fiscal years 2009 and 2008 were increased by $0.4 million and $2 million after income taxes, respectively.
Required:
1. Why does GAAP require LCD to retrospectively adjust prior years' financial statements for this type of accounting change?
2. Assuming that the quantity of inventory remained stable during 2008, did the cost of LCD's inventory move up or down during that period?