#2 Flashcards
Cumulative effect of changing from cash basis to accrual basis
Cash basis for financial reporting is not accepted under GAAP, so it would be an error correction. Only accrual accounting basis is accepted under GAAP.
Is the effect of change in accounting principle a prior period adjustmenet?
No. Treated retrospectively, not prior adjustment.
Under U.S. GAAP, a material loss should be presented separately as a component of income from continuing operations when it is
Unusual in nature or infrequent in occurrence. This is for shit that should be presented separately for continuing operation, NOT extraordinary items.
What happens when a company approves a plan to dispose of one of the assets or operating segments of the company?
The income or loss of that asset/operating segment for the whole fiscal year will be reported in discontinued operation.
Cumulative effect of a change in accounting principle is shown as
Adjustment to beginning retained earnings. Does not affect income.
Where should extraordinary items be reported as a component of income in relation to cumulative effect of accounting changes and discontinued operations?
Reported after continuing and discontinued operations. Cumulative effect of accounting change is not on income, because it’s on retained earnings.
When there is a change in entity, what happens to the financial statement?
All prior periods of the financial statements should be restated.
How does changing from cost method or equity method affect the financial statement?
A change from cost method to equity method requires restatement. On the other hand, change from equity method to cost method does not require restatement and is accounted for prospectively.
How does a new depreciation method affect retained earnings?
It doesn’t. No adjustments should be made to retained earnings and no retrospective change needed. Only prospective change starting with the year of the change and the current book value of the asset.
What does changes in estimates affect?
Current and subsequent periods, so no change to prior periods and no change to retained earnings.
Sales Representative salaries is reported in what expense?
Selling expense
What expenses are freight in and freight out?
Freight in is part of cost of inventory, while freight out is part of selling cost
What are accounting and legal fees, officers salaries, and insurance?
General and administrative expense
What happens when you suffer loss because your shit turn out to be poisonous or illegal?
Extraordinary loss, motherfucker!
How is extraordinary items reported?
As a component of net income, after continuing and discontinued operations.
Time period effect of change in accounting principles under IFRS
cumulative effect adjustment on the balance sheet for the beginning of PRIOR year. So if I changed that shit in 2014, then the adjustment will be made for Jan 1, 2013.
Sales, purchase discounts, and recovery of accounts written off. Which ones do not affect revenue?
Purchase discounts and recovery of accounts written off. First one reduces CoGS and not affect revenue, while the second just doesn’t affect revenue.
A transaction that is unusual in nature or infrequent in occurrence should be reported as
component of income from continuing operations, but NOT net of taxes. Because items in continuing operations are not reported net of taxes.
When the company discovers an error in year 3 on the financial statement of year 1 that affects both year 1 and 2, how should the company report the error?
Restate the financial statements for year 1 and 2. Also, the cumulative effect of the error on years 1 and 2 should be reflected in the CARRYING AMOUNTS of assets and liabilities as of the beginning of year 3.
If a change in accounting estimate cannot be distinguished from a change accounting principle, how should you treat it?
It’s considered a change in accounting estimate. Just think of depreciation.
