Accounting Changes

Question 1

How are changes in accounting principle applied?

Answer 1

Retrospective Application:
Prior Periods adjusted
Retained Earnings adjusted
Completed Contract to % Completion
Ex: LIFO to FIFO

Question 2

Would a change from Completed Contract to Percentage of Completion be a change in accounting principle- or a change of estimate?

How would it be applied?

Answer 2

A change of principle.

Applied retrospectively.

Question 3

Would a change from LIFO to FIFO be a change in accounting principle or a change of estimate?

How would this change be applied?

Answer 3

A change in accounting principle.

Applied retrospectively.

Question 4

How is a change in accounting estimate applied?

Answer 4

A change in accounting estimate is applied prospectively (going forward).

No backwards adjustment is made.

Question 5

Would a change from straight line depreciation to double declining balance be a change in accounting principle or a change in estimate?

How would this change be applied?

Answer 5

Change in depreciation method would be a change in accounting estimate.

It is applied prospectively.

Question 6

How is a correction of an accounting error made?

Answer 6

Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements.

The correction of the error must be included in the footnotes.

Question 7

What are the requirements for a prior period adjustment?

Answer 7

Effect is Material

Is identifiable in Prior Period

Couldn’t be estimated in Prior Periods

Question 8

How is a change from a non-GAAP accounting method to a GAAP method recorded?

Answer 8

It is treated as a correction of an accounting error.

Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements

Correction of the error must be included in the footnotes

Question 9

How does an inventory error effect the financial statements?

Answer 9

Effect on Ending Inventory : Effect on Net Income

If one is overstated- both overstated. If one is understated- both understated.

Misstating inventory corrects itself after TWO periods.

Question 10

How is a change in entity recorded?

Answer 10

Applied retrospectively.

All prior periods presented for comparative purposes must reflect the change

Footnote disclosures must be made

Changing to Consolidated Statements

Question 11

What is Change in Accounting Principle?

Answer 11

a change in a method used, such as using a different depreciation method or switching from LIFO to FIFO.

• Companies Must handle retrospectively
• Error of Correction
• need to restate in financial statement
• require full disclosure in the footnotes of the financial statements to describe the justification and financial effects of the change.

Question 12

What is Change in Accounting Estimate?

Answer 12

an accounting estimate change could be the recalculation of machine’s estimated life due to wear and tear.
-does not need to be restated

Question 13

What is the effect of LIFO inventory method ?

Answer 13

Reduce in Income=> Reduce in Income Tax

Question 14

What happen to Income Tax using LIFO inventory method?

Answer 14

Income tax will reduced because LIFO REDUCE Income

Question 15

A change in “Accounting Principle” that is Inseparable from a change in “Accounting Estimate” should report as

Answer 15

As a component of income from continuing operations, in the period of change and future periods if the change affect both

Question 16

the effective income tax rates for operations for the full year should reflect

Answer 16

Anticipated foreign tax rates and available tax planing alternative. the effect of other anticipated tax credits, capital gains rates, and foreign tax credits should be included.

Question 17

A change in depreciation method is now considered

Answer 17

to be both a change in principle and a change in estimate.

Question 18

A change from LIFO to FIFO for inventory valuation (costing) is

Answer 18

a change in accounting principle.

Question 19

Rule: The cumulative effect of a change in accounting principle equals the difference between retained earnings at the beginning of period of the change and what retained earnings would have been if the change was applied to all affected prior periods.

Answer 19

Rule: The cumulative effect of a change in accounting principle equals the difference between retained earnings at the beginning of period of the change and what retained earnings would have been if the change was applied to all affected prior periods.

Question 20

A change in the composition of the elements of cost such as changing from the individual item approach to the aggregate approach in applying the lower of FIFO cost or market to inventories (LCM is covered in F4) is an example of a change in accounting principle. The cumulative effect of the change in accounting principle should now be shown on the retained earnings statement as an adjustment to the beginning balance of retained earnings, in what is called retrospective application.

Answer 20

A change in the composition of the elements of cost such as changing from the individual item approach to the aggregate approach in applying the lower of FIFO cost or market to inventories (LCM is covered in F4) is an example of a change in accounting principle. The cumulative effect of the change in accounting principle should now be shown on the retained earnings statement as an adjustment to the beginning balance of retained earnings, in what is called retrospective application.

Question 21

Rule: The cumulative effect of a change in accounting principle equals the difference between retained earnings at the beginning of period of the change and what retained earnings would have been if the change was applied to all affected prior periods.

Answer 21

Rule: The cumulative effect of a change in accounting principle equals the difference between retained earnings at the beginning of period of the change and what retained earnings would have been if the change was applied to all affected prior periods.

Question 22

Rule: “Development stage enterprises” present their FS in accordance with GAAP and make additional disclosures such as: cumulative net losses, cumulative deficit, cumulative sales and expenses.

Answer 22

Rule: “Development stage enterprises” present their FS in accordance with GAAP and make additional disclosures such as: cumulative net losses, cumulative deficit, cumulative sales and expenses.

Question 23

Deficits accumulated during the development stage of a company should be reported as a part of stockholders’ equity.

Rule: Development stage enterprises should present FS in accordance with GAAP and make additional disclosures such as: cumulative net losses, cumulative deficit (as part of equity), cumulative sales & expenses (part of I/S), cumulative statement of cash flows and supplementary “shareholders equity.”

Answer 23

Deficits accumulated during the development stage of a company should be reported as a part of stockholders’ equity.

Rule: Development stage enterprises should present FS in accordance with GAAP and make additional disclosures such as: cumulative net losses, cumulative deficit (as part of equity), cumulative sales & expenses (part of I/S), cumulative statement of cash flows and supplementary “shareholders equity.”

Question 24

what is Change in an Accounting Principle?

Answer 24

• Change in accounting method

- LIFO inventory method to FIFO, others

Question 25

What is a Change in Accounting Estimate?

Answer 25

• change in depreciation method for new assets
• Not a change in accounting principle
• retrospective application : changed in RE statement

Question 26

Prior Period Adjustments

Answer 26

• adjustments are related to accounting errors

- adjusted in Retained Earning Statement, NOT INCOME Statement.

Question 27

retrospective application

Answer 27

The cumulative effect of the change in accounting principle should now be shown on the retained earnings statement as an adjustment to the beginning balance of retained earnings

Question 28

Rule: To be significant enough to report on, a segment must be at least 10% of:

Combined revenues (whether intersegment or unaffiliated customers), or

Operating income, or

Identifiable assets.

Answer 28

Combined revenues (whether intersegment or unaffiliated customers), or

Operating income, or

Identifiable assets *** Does Not included Interest Income***

Question 29

YIV, Inc. is a multidivisional corporation, which has both intersegment sales and sales to unaffiliated customers. YIV should report segment financial information for each division meeting which of the following criteria?

Answer 29

Segment revenue is 10% or more of combined revenue of all the company segments.
Rule: To be significant enough to report on, a segment must be at least 10% of:

Combined revenues (whether intersegment or affiliated customers), or

Operating profit (of all segments not having an operating loss), or

Identifiable assets.

Question 30

reportable segments

Answer 30

Rule: A segment must be at least 10% of:

Combined revenues (whether intersegment or unaffiliated customers), or

Operating income (of all segments not having an operating loss), or

Identifiable assets.

Question 31

The concept of faithful representation includes

Answer 31

neutrality, completeness, and freedom from error.

Question 32

accounted for prospectively

Answer 32

• in current and future periods

- change in estimate

Question 33

IFRS prohibits the reporting of gains/losses as extraordinary. Therefore, none of the infrequent items are extraordinary under IFRS:

Answer 33

IFRS prohibits the reporting of gains/losses as extraordinary. Therefore, none of the infrequent items are extraordinary under IFRS:

Question 34

If a change in accounting estimate cannot be distinguished from a change in accounting principle, the change is considered

Answer 34

considered a change in accounting estimate treated as a change in accounting principle and is accounted for prospectively.

Question 35

Differentiating between a change in accounting estimate and a change in accounting principle is more difficult than differentiating between a change in accounting estimate and a correction of an error, because a change can be essentially both a change in accounting estimate and a change in accounting principle. An example of this situation is a change in depreciation method. It is a change in accounting principle, but also a change in the estimated future benefits of the asset.

Answer 35

Differentiating between a change in accounting estimate and a change in accounting principle is more difficult than differentiating between a change in accounting estimate and a correction of an error, because a change can be essentially both a change in accounting estimate and a change in accounting principle. An example of this situation is a change in depreciation method. It is a change in accounting principle, but also a change in the estimated future benefits of the asset.