Accounting Changes
Response to the following problem:
Berkeley Company, a manufacturer of many different products, changed its inventory method from FIFO to LIFO. The LIFO method was determined to be preferable.
In addition, Berkeley changed the residual values used in computing depreciation for its office equipment. It made this change on January 1, 2010 because it obtained additional information.
On December 31, 2010, Berkeley changed the specific subsidiaries comprising the group of companies for which consolidated financial statements are presented.
Required:
1. What kind of accounting change is each of the preceding three situations? For each situation, indicate whether or not the company should show:
a. The retrospective application of a new accounting principle.
b. The effects on the financial statements of the current and future periods.
c. Restatement of the financial statements of all prior periods.
2. Why does the company have to disclose a change in accounting principle?