In preparation for significant expansion of its international operations, ABC Co. has adopted a plan to gradually shift to the same accounting methods as used by its international competitors. Part of this plan includes a switch from LIFO inventory accounting to FIFO (recall that IFRS does not allow LIFO). ABC decides to make the switch to FIFO at January 1, 2014. The following data pertains to ABC’s 2014 financial statements (in millions of dollars).

                                                      

All sales and purchases were with cash. All of 2014’s compensation expense was paid with cash. (Ignore taxes.) ABC’s property, plant, and equipment cost $400 million and has an estimated useful life of 10 years with no salvage value.
ABC Co. reported the following for fiscal 2013 (in millions of dollars):

                            

Accounting
Prepare ABC’s December 31, 2014, balance sheet and an income statement for the year ended December 31, 2014. In columns beside 2014’s numbers, include 2013’s numbers as they would appear in the 2014 financial statements for comparative purposes.

Analysis
Compute ABC’s inventory turnover for 2013 and 2014 under both LIFO and FIFO. Assume averages are equal to year-end balances where necessary. What causes the differences in this ratio between LIFO and FIFO?

Principles
Briefly explain, in terms of the principles discussed in Chapter 2, why GAAP requires that companies that change accounting methods recast prior year’s financial statement data.