Change in accounting method for inventory, Accounting Basics

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Q. Change in accounting method for inventory?

Occasionally companies vary inventory methods in spite of the principle of consistency. Improved financial reporting is the merely justification for a change in inventory method. A company that changes its inventory method should make a full disclosure of the change. Typically the company makes a full disclosure in a footnote to the financial statements. The annotation consists of a complete description of the change the reasons why the change was made and if possible the effect of the change on net income.

J. M. Tull Industries Inc sells a diverse range of metals (brass, aluminium, stainless steel, copper, steel and nickel alloys) for severe corrosion conditions and high temperature applications. For instance when J. M. Tull changed as of lower of average cost or market to LIFO the following footnote appeared in its annual report

The company altered its method of determining inventory cost from the lower of average cost or else market method to the last-in first-out (LIFO) method for substantially all inventory. This change was made for the reason that management believes LIFO more clearly reflects income by providing a closer matching of current cost against current revenues.


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