Final answer:
Yes, it is mandatory to disclose the effect of an inventory valuation method change on net income in the financial statements for transparency and comparability. Such disclosure includes the nature, reasons, and impacts of the change on financial results. Therefore, the correct option is 3.
Step-by-step explanation:
Yes, when a company changes its inventory valuation method, the effect of the change on net income should be disclosed in the financial statements. This is because changes in inventory valuation methods (such as from FIFO to LIFO, or vice versa) can significantly impact the reported earnings of the company. Disclosing this information is essential for transparency and ensures that financial statement users can make an informed judgment about the company's financial performance and position. According to accounting principles, full disclosure of significant changes is required to preserve the comparability of financial statements over time. When a change in inventory method is made, it is often applied retrospectively, and prior-year financial statements are typically restated to reflect the change, allowing users to compare performance consistently across periods.
Financial reporting standards dictate that the nature of the change, the reasons for the change, and its effects on the financial results must be clearly explained either in the footnotes to the financial statements or within the financial statements themselves.