In this business climate it is completely understandable to want your company to present well. However, your proposed treatment of the items we discussed conflicts with one of the basic principles of accounting in that it does not provide full disclosure to the users of the financial statements. Specifically, these items do not follow the guidelines set forth by the FASB Accounting Standards Codification. Please see the following recommendations:
• According to FASB 250-10-50-1, a change in accounting principle requires the following three actions:
1. Disclose on the financial statements an explanation of the change. Better flow of goods and industry norms are adequate explanations.
2. Outline the methods used to change accounting principles. Outline the change from weighted-average to FIFO. This would include (a) any prior period information that has been retrospectively adjusted, (b) the current period effects on the income statement and earnings per share, and (c) the cumulative effect on retained earnings (i.e. $250,000 increase).
3. Recognition of any indirect effects. Disclose any information that is indirectly affected.
• According to FASB 250-10-50-7 and 50-8, a correction of an error requires the following two actions:
1. Disclose that previously issued financial statements have been restated and the nature of the error. This would include the disclosure of (a) any line items and per-share amounts affected by the error in prior…