On January 1, 2020, Miner Corp. changed its inventory costing from FIFO to average cost for financial statement and income tax purposes, to make their reporting as reliable and more relevant. The change resulted in a $ 600,000 increase in the beginning inventory at January 1, 2020. Assume a 30% income tax rate. The cumulative effect of this accounting change should be reported by Chickadee in its 2020
A) Retained earnings statement as a $ 420,000 addition to the beginning balance.
B) Income statement as $ 420,000 other comprehensive income.
C) Retained earnings statement as a $ 600,000 addition to the beginning balance.
D) Income statement as a $ 600,000 cumulative effect of accounting change.

Question

Quizplus · Accepted Answer

The cumulative effect of the accounting change, after accounting for income taxes (30% of $600,000 = $180,000), results in a net increase of $420,000 ($600,000 - $180,000) to the beginning balance of retained earnings. Changes in accounting principles that are applied retrospectively typically adjust the opening balance of retained earnings to reflect the cumulative effect of the change, net of tax.