Ramirez Co. decides at the beginning of 2022 to adopt the FIFO method of inventory valuation. Ramirez has used the average-cost method for financial reporting since its inception on January 1, 2020, and has maintained records adequate to apply the FIFO method retrospectively. Ramirez concluded that FIFO is the preferable inventory method because it reflects the current cost of inventory on the statement of financial position. The following table presents the effects of the change in accounting policy on inventory and cost of goods sold.

Retained earnings reported under average-cost are as follows.

 ............................................... Retained Earnings Balance
December 31, 2020 ................................. $2,200
December 31, 2021 ................................. 4,200
December 31, 2022 ................................. 6,070

Other information:

1. For each year presented, sales are $4,000 and operating expenses are $1,000.

2. Ramirez provides two years of financial statements. 

Instructions

a. Prepare income statements under average-cost and FIFO for 2020, 2021, and 2022. Omit earnings per share.

b. Prepare income statements reflecting the retrospective application of the accounting change from the average-cost method to the FIFO method for 2022 and 2021.

c. Prepare the note to the financial statements describing the change in method of inventory valuation. In the note, indicate the income statement line items for 2022 and 2021 that were affected by the change in accounting policy.

d. Prepare comparative retained earnings statements for 2021 and 2022 under FIFO.

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Inventory Determined by Cost of Goods Sold Determined by Date Average-Cost Method FIFO Method Average-Cost Method FIFO Method January 1, 2020 $ 0 $ 0 $ $ December 31, 2020 100 80 800 820 December 31, 2021 200 240 1,000 940 December 31, 2022 320 390 1,130 1,100