In year 2, Sammi Corp. changes its inventory method from FIFO to the weighted-average method. Under the weighted-average method, the year 2 beginning inventory is $3,000 higher than the FIFO method. The financial statements are revised using the retrospective approach. What are the financial statement effects of the change in accounting principle

Year 1 net income will increase; year 1 retained earnings will increase

Explanation:

The reason is that the opening inventory value of year 2 is the closing amount of the year 1. Its similar to the closing cash amount left in till at the end of year 1 which is the opening amount at the start of year 2. So the opening inventory of year 2 is closing inventory of year 1. So when we say that the opening inventory of year 2 has increased by $3,000 this means that the closing inventory of year 1 has increased by $3,000.

So now as we know that:

Cost of goods sold = Op. Inventory + Purchases - Cl. Inventory

This means if the closing amount increases the cost of goods decreases and in the given scenario the closing inventory of year 1 has been increased which means that the cost of goods sold has decreased by $3000 which will decrease the cost of goods sold and this will increase the profit with the same amount.

And if the profit increases then:

Earning per share = Profit after tax (Increased) / Number of share (Same)

According to the above formula if the profit has increased the earning per share will also increase.

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