Problem 3 Kyto Electronics decides to adopt the average cost method of inventory valuation at the beginning of 2020. Kyto had used the LIFO method for financial reporting since its inception on January 1, 2018, 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: Inventory Determined by Cost of Goods Sold Determined by LIFO Average-Cost 3,000 Average-Cost 9,000 9,500 10,500 10,000 10,500 11,000 5,000 6,000 LIFO 2018 2,000 2019 3,000 2020 3,500 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 2018, 2019, and 2020. (b) Prepare comparative retained earnings statements for 2020 and 2019 under the average-cost method. Retained earnings reported under LIFO are as follows: Retained Earnings Balance 2018 $2,500 2019 4,500 2020 6,000