Question

Palmer Co. is evaluating the appropriate accounting for the following items. 1. Management has decided to switch from the FIFO inventory valuation method to the LIFO inventory valuation method for all inventories. 2. When the year-end physical inventory adjustment was made for the current year, the controller discovered that the prior year’s physical inventory sheets for an entire warehouse were mislaid and excluded from last year’s count. 3. Palmer’s Custom Division manufactures large-scale, custom-designed machinery on a contract basis. Management decided to switch from the completed-contract method to the percentage-of-completion method of accounting for longterm contracts. Identify and explain whether each of the above items is a change in accounting principle, a change in estimate, or an error

Short answer

The first part is a change in accounting principle, the second part is a change due to an error, and the third part is the change in accounting principle

Step-by-step solution

First Part

It is a change in accounting principles. In this case, the company is changing its policy of inventory valuation from FIFO to LIFO.

Second Part

It is a change due to an error. There was an error in recording the last year’s count.

Third Part

It is the change in accounting principles. The company is changing the accounting method from the completed-contract method to the percentage-of-completion method