300728 Accounting Change 3A

Question 1

How should a company report its decision to change from a cash basis of accounting to accrual basis of accounting?

Prospectively, with no amounts restated and no cumulative adjustment

As a correction of an error (net of tax), by adjusting the beginning balance of retained earnings

As a component of other comprehensive income

As a change in accounting principle, requiring the cumulative effect of the change (net of tax) to be reported in the income statement

Answer 1

As a correction of an error (net of tax), by adjusting the beginning balance of retained earnings

A change from an accounting principle that is not generally accepted to one that is generally accepted is a correction of an error. The cash basis is not generally accepted. Consequently, the change to accrual basis is a correction of an error. A correction of an error in prior years’ financial statements is reported in the year of correction by restating all prior years affected by the error. The cumulative effect of the error on periods prior to those presented must be reflected in the carrying amounts of the assets and liabilities as of the beginning of the earliest year presented.

Question 2

Accounting Change

Answer 2

An accounting change is a change in (1) an accounting principle, (2) an accounting estimate, or (3) the reporting entity. The correction of an error in previously issued financial statements is not an accounting change.

FASB ASC 250-10-20

Question 3

Correction of Error

Answer 3

Correction of error is a change in an amount reported in previously issued financial statements that was in error due to unintentional mathematical mistakes, mistakes in application of a principle, or oversight or misuse of facts. It is also a change from an accounting principle that is not GAAP to one that is GAAP. It is distinguished from change in accounting estimate.

Correction of error is given retroactive treatment.

FASB ASC 250-10-45-23

Question 4

Restatement

Answer 4

Restatement is the process of revising previously issued financial statements to reflect the correction of an error in those financial statements.

FASB ASC Glossary

Question 5

2150.05

Answer 5

The cash basis method of accounting is not an allowable method under GAAP unless there is no material difference from the accrual method. However, cash-basis financial statements are sometimes provided for investors or creditors. Cash basis accounting results in a measure similar to net income called net operating cash flow. Net operating cash flow is the difference between cash receipts and cash disbursements.

Question 6

2313.01

Answer 6

A correction of an error in prior years’ financial statements is reported in the year of correction by restating all prior years affected by the error. The cumulative effect of the error on periods prior to those presented must be reflected in the carrying amounts of the assets and liabilities as of the beginning of the earliest year presented in the current period’s financial report. In addition, the offsetting amount of this cumulative effect must be reported as an adjustment to the opening balance of retained earnings of the earliest year presented in the current period’s financial report.

Question 7

FASB ASC 250-10-05-2

Question 8

FASB ASC 250-10-45-23, 45-24