Mayfair Department Stores, Inc., operates over 30 retail stores in the Pacific Northwest. Prior to 2011, the company used the FIFO method to value its inventory. In 2011, Mayfair decided to switch to the dollar-value LIFO retail inventory method. One of your responsibilities as assistant controller is to prepare the disclosure note describing the change in method that will be included in the company's 2011 financial statements. Kenneth Meier, the controller, provided the following information:
• Internally developed retail price indexes are used to adjust for the effects of changing prices.
• If the change had not been made, cost of goods sold for the year would have been $22 million lower. The company's income tax rate is 40% and there were 100 million shares of common stock outstanding during 2011.
• The cumulative effect of the change on prior years' income is not determinable.
• The reasons for the change were
(a) To provide a more consistent matching of merchandise costs with sales revenue, and
(b) The new method provides a more comparable basis of accounting with competitors that also use the LIFO method.
1. Prepare for Kenneth Meier the disclosure note that will be included in the 2011 financial statements.
2. Explain why the “cumulative effect of the change on prior years' income is not determinable.”