The following is an excerpt from the financial statements of Talbot Industries (a fictional company):
Effective September 30, 20X1, the Company changed its method of accounting for inventories from the LIFO method principally to the Specific Identification method because, in the opinion of management, there is a better matching of revenues and expenses, better correlation of accounting and financial information with the method by which the Company is managed, and better presentation of inventories at values that more fairly present the inventories’ cost. During 20X2, Chaney Technologies (a fictional company) changed its inventory cost flow assumption from LIFO to the average cost method. The following is an excerpt from Chaney Technologies’s financial statements.
The change to the average cost method will conform all inventories of the Company to the same method of valuation. The Company believes that the average cost method of inventory valuation provides a more meaningful presentation of the financial position of the Company because it reflects more recent costs in the balance sheet. Under the current economic environment of low inflation and an expected reduction in inventories and low production costs, the Company believes that the average cost method also results in a better matching of current costs with current revenues.
Required:
1. Evaluate each of the justifications provided by Talbot for changing its inventory cost flow assumption.
2. Evaluate each of the justifications provided by Chaney Technologies for changing its inventory cost flow assumption.
