On December 31, 2018, Grantham, Inc. appropriately changed its inventory valuation method to FIFO cost from weighted-average cost for financial statement and income tax purposes. The change will result in a $3,500,000 increase in the beginning inventory at January 1, 2018. Assume a 30% income tax rate. The cumulative effect of this accounting change on beginning retained earnings is

It was given that there is an accounting change in inventory valuation method from weighted average cost to FIFO.

As a result, the beginning inventory has been increased by $3,500,000. That implies, the net income has been decreased by $3,500,000

As we know that with effect of income tax of 30%, the remaining amount of net income should be carried to Retained earnings.

Income tax on increased net income = $3,500,000 * 30% = $1,050,000

Thus, the balance of net income being carried to Retained Earnings is $2,450,000 ($3,500,000 - $1,050,000). Therefore, the change in accounting change results in increase of $2,450,000 in the Retained earnings balance.

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