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, 2020. The following data pertains to ABC?s 2020 financial statements (in millions of dollars).

Sales....................................................................$550Inventory purchases...........................................35012/31/20 inventory (using FIFO)........................580Compensation expense.......................................17

All sales and purchases were with cash. All of 2020?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 2019 (in millions of dollars):

Accounting

Prepare ABC?s December 31, 2020, balance sheet and an income statement for the year ended December 31, 2020. In columns beside 2020?s numbers, include 2019?s numbers as they would appear in the 2020 financial statements for comparative purposes.

Analysis

Compute ABC?s inventory turnover for 2019 and 2020 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.

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ABC Co. Balance Sheet At December 31, 2019 2019 2018 2019 2018 $ 365 $ 200 $ 500 $ 500 Cash Common stock Inventory Property, plant, and equipment Accumulated depreciation Retained earnings 540 500 480 685 400 400 (80) (40) Total equity Total assets $1,185 $1,040 $1,185 $1,040 ABC Co. Income Statement For the Year Ended December 31, 2019 2019 $ 500 (300) (40) (15) Sales Cost of goods sold Depreciation expense Compensation expense $ 145 Net income Summary of Significant Accounting Policies Inventory: The company accounts for inventory by the LIFO method. The current cost of the com- pany's inventory, which approximates FIFO, was $60 and $50 higher at the end of fiscal 2019 and 2018, respectively, than those reported in the balance sheet.