Question

State how each of the following items is reflected in the financial statements. (a) Change from FIFO to LIFO method for inventory valuation purposes. (b) Charge for failure to record depreciation in a previous period. (c) Litigation won in current year, related to prior period. (d) Change in the realizability of certain receivables. (e) Write-off of receivables. (f) Change from the percentage-of-completion to the completed-contract method for reporting net income.

Short answer

Inventory can be raw material or finished goods. They affect the financial statement in various ways.

Step-by-step solution

Definition of Inventory

The inventory is defined as the raw material used in the productions process or the finished goods that can be sold directly.

Affects the financial statements

1. It will affect the beginning inventory of the current period; it is not possible to change the method retrospectively.
2. There will be the correction of the error and, therefore, the prior period adjustment, and there should be an adjustment to the beginning balance of retained earnings.
3. Increase the income for litigation settlement.
4. There will be a change in accounting estimates, currently and retrospectively.
5. There should be a reduction in accounts receivables and allowance for doubtful accounts.
6. There should be a change in principles, and retrospective application should be there.