Question

Which of the following is correct regarding a change from the LIFO method of inventory costing to the FIFO method?

1) This would be considered a change in accounting estimate.
2) This would not be allowed due to the FIFO conformity rule.
3) This should be noted in the disclosures to the financial statements.
4) This is not allowed due to the LIFO conformity rule.

Answer 1

Changing from the LIFO to FIFO method of inventory costing is a change in accounting principle, not a change in accounting estimate. It must be disclosed in the financial statements, and there is no rule preventing the change from LIFO to FIFO. The LIFO conformity rule requires using LIFO for both tax and financial reporting if used for taxes, but does not restrict moving to FIFO.

Step-by-step explanation:

When an entity changes from the Last-In, First-Out (LIFO) method of inventory costing to the First-In, First-Out (FIFO) method, it is important to understand the correct accounting treatment of such a change. This is not considered a change in accounting estimate but rather a change in accounting principle. Regarding the options provided:

1. This would not be considered a change in accounting estimate. Changes in accounting estimates are adjustments for events that affect the current and future periods, such as changes in the useful life of an asset.
2. The FIFO conformity rule does not exist, rather it's the LIFO conformity rule. However, this rule specifically requires that if LIFO is used for tax purposes, it must also be used to report inventory in financial statements, not the other way around.
3. This change should be noted in the disclosures to the financial statements. When changing accounting principles, companies are required to disclose the nature of the change, the reasons why the new principle is preferable, and the impact of the change on the financial statements.
4. The last statement is incorrect since it's a misconception of the LIFO conformity rule, which does not restrict changing from LIFO to FIFO.