Question

The retrospective approach:

Big merchandisers changed from FIFO method of costing inventories to the weighted-average method during 2021. when reported in the 2021 comparative financial statements, the 2020 inventory amount will be:

a) Increased
b) Decreased
c) Increased or decreased, depending on how prices changed during 2021
d) Unaffected

Answer 1

When switching from the FIFO to the weighted-average method for costing inventories, the reported 2020 inventory amount will be increased or decreased depending on how prices changed during 2021.

Step-by-step explanation:

When big merchandisers change from the FIFO (First-In, First-Out) method of costing inventories to the weighted-average method, it affects the valuation of the inventory. The weighted-average method calculates the average cost of all items in the inventory based on the quantity and cost of each item. Therefore, when switching to the weighted-average method during 2021, the reported 2020 inventory amount will be increased or decreased, depending on how prices changed during 2021. If prices increased during 2021, the weighted-average cost would be higher than the FIFO cost, resulting in an increased 2020 inventory amount. Conversely, if prices decreased during 2021, the weighted-average cost would be lower than the FIFO cost, resulting in a decreased 2020 inventory amount.