A change in accounting principal occurs when the principal used in the current year is different from the one used in the preceding year. In this case the valuation of inventory has been changed from FIFO method to Average cost method. Accounting rules permit such a change when management can show that the new principle is preferable to the old principle.
Work Step by Step
Companies report most changes in accounting principle in their financial statements. That is, they report both the current period and previous periods using the new principle. As a result the same principle applies in all periods. Changes in accounting principle should result in financial statements that are more informative for statement users. They should not be used to artificially improve the reported performance or financial position of the corporation.