Question

a company reported inventory in the 2023 year-end balance sheet, using the average cost method, as $342,000. in 2024, the company decided to change its inventory method to fifo. if the company had used the fifo method in 2023, ending inventory would have been $367,000. what adjustment would the company make for this change in inventory method? multiple choice debit cost of goods sold for $25,000; credit inventory for $25,000 debit inventory for $367,000; credit cost of goods sold for $367,000 no adjustment is necessary. debit inventory for $25,000; credit retained earnings for $25,000

Answer 1

To adjust for the change from the average cost method to FIFO, the company would debit inventory and credit retained earnings by the difference in ending inventory value, which is $25,000.

Step-by-step explanation:

The student has asked what adjustment a company would make if it changes its inventory accounting method from the average cost method to the FIFO (First-In, First-Out) method. If the company had reported inventory as $342,000 using the average cost method but would have reported $367,000 using FIFO, the adjustment to be made would be an increase in the inventory balance.

The correct adjustment in this scenario would be to debit inventory for $25,000; this increases the inventory account on the balance sheet to reflect what it would have been under FIFO. Concurrently, you would credit retained earnings for $25,000, representing the change in net income from previous years resulting from the inventory adjustment.

Therefore, the answer is 'debit inventory for $25,000; credit retained earnings for $25,000'.