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# Change in inventory accounting method to average cost

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The management of Kreiter Instrument Company had concluded, with the concurrence of its independent auditors, that results of operations would be more fairly presented if Kreiter changed its method of pricing inventory
from last-in, first-out (LIFO) to average cost in 2007.

Given below is the 5-year summary of income under LIFO and a schedule of what the inventories would be if stated on the average cost method.

KREITER INSTRUMENT COMPANY
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED MAY 31
2003 2004 2005 2006 2007
Sales-net \$13,964 \$15,506 \$16,673 \$18,221 \$18,898
Cost of goods sold
Beginning inventory 1,000 1,100 1,000 1,115 1,237
Purchases 13,000 13,900 15,000 15,900 17,100
Ending inventory (1,100) (1,000) (1,115) (1,237) (1,369)
Total 12,900 14,000 14,885 15,778 16,968
Gross profit 1,064 1,506 1,788 2,443 1,930
Administrative expenses 700 763 832 907 989
Income before taxes 364 743 956 1,536 941
Income taxes (50%) 182 372 478 768 471
Net income 182 371 478 768 470
Retained earnings-beginning 1,206 1,388 1,759 2,237 3,005
Retained earnings-ending \$ 1,388 \$ 1,759 \$ 2,237 \$ 3,005 \$ 3,475
Earnings per share \$1.82 \$3.71 \$4.78 \$7.68 \$4.70

SCHEDULE OF INVENTORY BALANCES USING AVERAGE COST METHOD
FOR THE YEARS ENDED MAY 31
2002 2003 2004 2005 2006 2007
\$950 \$1,124 \$1,091 \$1,270 \$1,480 \$1,699

Instructions

Prepare comparative statements for the 5 years, assuming that Kreiter changed its method of inventory
pricing to average cost. Indicate the effects on net income and earnings per share for the years involved.
Kreiter Instruments started business in 2002. (All amounts except EPS are rounded up to the nearest dollar.)

#### Solution Summary

The solution recalculates ending inventory for Kreiter Instrument based on average cost and shows its effect on net income & eps.

\$2.19
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## Change in Principle?Inventory Methods

E22-2 (Change in Principle?Inventory Methods) Holder-Webb Company began operations on
January 1, 2005, and uses the average cost method of pricing inventory. Management is contemplating a
change in inventory methods for 2008. The following information is available for the years 2005-2007.
Net Income Computed Using
Average Cost Method FIFO Method LIFO Method
2005 \$15,000 \$19,000 \$12,000
2006 18,000 23,000 14,000
2007 20,000 25,000 17,000
Instructions
(Ignore all tax effects.)
(a) Prepare the journal entry necessary to record a change from the average cost method to the FIFO
method in 2008.
(b) Determine net income to be reported for 2005, 2006, and 2007, after giving effect to the change in
accounting principle.
(c) Assume Holder-Webb Company used the LIFO method instead of the average cost method during
the years 2005-2007. In 2008, Holder-Webb changed to the FIFO method. Prepare the journal
entry necessary to record the change in principle.

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