Companies are allowed to change accounting principles for a valid business reason. Please evaluate the excerpt provided below as to how the “valid business reason” will affect the firm’s financial results.
During fiscal year 2020, Harris Technologies changed its inventory cost flow assumption from LIFO to the average cost method. The following is an excerpt from Harris Technologies’ 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 lower production costs, the Company believes that the average cost method also results in a better matching of current costs with current revenues.
Evaluate each of the justifications made by Harris Technologies for changing its inventory cost flow assumption.
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