Question

On December 31, 2013, Grantham, Inc. appropriately changed its inventory valuation method to FIFO cost from weighted-average cost for financial statement and income tax purposes. The change will result in a $2,000,000 increase in the beginning inventory at January 1, 2013. Assume a 30% income tax rate. The cumulative effect of this accounting change on beginning retained earnings is

a. $0.
b. $600,000.
c. $1,400,000.
d. $2,000,000.

Answer 1

The change in inventory valuation method from weighted-average cost to FIFO cost will increase the beginning inventory by $2,000,000, leading to changes in net income and retained earnings.

Step-by-step explanation:

The cumulative effect of changing the inventory valuation method from weighted-average cost to FIFO cost will result in a $2,000,000 increase in the beginning inventory at January 1, 2013. This means that the beginning inventory for 2013 will be $2,000,000 higher than previously reported.

Since this change affects the beginning retained earnings, it will also impact the net income for the year. The increase in inventory will be recognized as a noncash expense for tax purposes, resulting in a decrease in taxable income.

Considering the 30% income tax rate, the decrease in taxable income will lead to a reduction in income tax expense and an increase in net income after taxes. As a result, the cumulative effect of this accounting change on beginning retained earnings will be $2,000,000.