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AICPA Exam CPA-Financial Topic 3 Question 22 Discussion
Topic #: 3
On August 31, 1992, Harvey Co. decided to change from the FIFO periodic inventory system to the weighted average periodic inventory system. Harvey is on a calendar year basis. The cumulative effect of the change is determined:
Rule: The cumulative effect of a change in accounting principle equals the difference between retained earnings at the beginning of period of the change and what retained earnings would have been if the change was applied to all affected prior periods.
Choice 'a' is correct. As of January 1, 1992, the beginning of the year. This assumes that the company is not presenting comparative financial statements. If comparative financial statements are presented, then the adjustment is made to the beginning retained earnings of the earliest year presented.
Choice 'b' is incorrect. The cumulative effect of the change is not determined as of the date the decision is made.
Choices 'c' and 'd' are incorrect. The cumulative effect of the change is not determined by a weighted average. (A far out distractor.)
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