Kyto Electronics decides to adopt the average cost method of inventory valuation at the beginning of 2014. Kyto had used the LIFO method for financial reporting since its inception on January 1, 2012, and had maintained records adequate to apply the average-cost method retrospectively. Kyto concluded that average-cost is the preferable inventory method because extreme effects of FIFO or LIFO on the income statement and balance sheet are averaged. The following table presents the effects of the change in accounting principles on inventory and cost of goods sold for each year.

Other information:
1. For each year presented, sales are $15,000 and operating expenses are $2,500.
2. Kyto provides 2 years of financial statements and earnings per share information is not required.
3. Ignore income taxes.

Instructions
(a) Prepare income statements under LIFO and average-cost for 2012, 2013, and 2014.
(b) Prepare income statements reflecting the retrospective application of the accounting change from the LIFO method to the average-cost method for 2013 and 2014.
(c) Prepare comparative retained earnings statements for 2013 and 2014 under the average-cost method. Retained earnings reported under LIFO are as follows:
Retained Earnings Balance
2012 ........... $2,500
2013 ...........4,500
2014 ...........6,000
(d) 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 2013 and 2014 that were affected by the change in accountingprinciple.

Inventory Determined by Cost of Goods Sold Determined by LIFO Average-CostLIFO $10,000 10,500 11,000 Average-Cost 2012 $2,000 2013 3,000 2014 3,500 $3,000 5,000 6,000 $9,000 9,500 10,500