Question

In preparation for significant international operations, ABC Co. has adopted a plan to gradually shift to the same accounting policies as used by its international competitors. Part of this plan includes a switch from average cost inventory accounting to FIFO. ABC decides to make the switch to FIFO at January 1, 2011. The following data pertains to ABC’s 2011 financial statements.
Sales .................................................$550
Inventory purchases............................350
12/31/11 inventory (using FIFO)........580
Compensation expense..........................17
All sales and purchases were with cash as were all of 2011’s compensation expense (ignore taxes). ABC’s plant, property, and equipment cost $400 and has an estimated useful life of 10 years with no residual value.
ABC Co. reported the following for fiscal 2010 (amounts are in millions).


Summary of Significant Accounting Policies
Inventory: The company accounts for inventory by the average cost method. The current cost of the company’s inventory, which approximates FIFO, was $60 and $50 higher at the end of fiscal 2010 and 2009, respectively, than those reported in the statement of financial position.
Accounting
Prepare ABC’s December 31, 2011, statement of financial position and an income statement for the year ended December 31, 2011. In columns beside 2011’s numbers, include 2010’s numbers, as they would appear in the 2011 financial statements for comparative purposes.
Analysis
Compute ABC’s inventory turnover for 2010 under both average cost and FIFO. Assume averages are equal to year-end balances where necessary. What causes the differences in this ratio between average cost and FIFO?
Principles
Briefly explain, in terms of the policies discussed in Chapter 22, why IFRS requires that companies that change accounting policies present restated prior year’s financial statementdata.


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  • CreatedJune 17, 2013
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