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Subject 3. Inventory method changes

Consistency of inventory costing is required under both IFRS and U.S. GAAP. If a company changes an accounting policy, the change must be justifiable and applied retrospectively to the financial statements. An exception to the retrospective restatement is when a company reporting under U.S. GAAP changes to the LIFO method.

Practice Question 1

Under U.S. GAAP, retrospective adjustments are NOT made to the financial statements if a company is changing inventory method:

A. From LIFO to FIFO.
B. From FIFO to LIFO.
C. A retrospective restatement is always required.

Correct Answer: B

The firm must do so on a prospective basis, and retrospective adjustments are not made to the financial statement.

Practice Question 2

Under U.S. GAAP, retrospective adjustments are NOT made to the financial statements if a company is changing inventory method:

A. From LIFO to FIFO.
B. From FIFO to LIFO.
C. A retrospective restatement is always required.

Correct Answer: B

Under U.S. GAAP, an exception to the retrospective restatement is when a company reporting under U.S. GAAP changes to the LIFO method.

Under IFRS a retrospective adjustment is always required.

Study notes from a previous year's CFA exam: