Accounting Changes Flashcards
How are changes in accounting principle applied?
Retrospective Application:
Prior Periods adjusted
Retained Earnings adjusted
Completed Contract to % Completion
Ex: LIFO to FIFO
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?
A change of principle.
Applied retrospectively.
Would a change from LIFO to FIFO be a change in accounting principle or a change of estimate?
How would this change be applied?
A change in accounting principle.
Applied retrospectively.
How is a change in accounting estimate applied?
A change in accounting estimate is applied prospectively (going forward).
No backwards adjustment is made.
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?
Change in depreciation method would be a change in accounting estimate.
It is applied prospectively.
How is a correction of an accounting error made?
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.
What are the requirements for a prior period adjustment?
Effect is Material
Is identifiable in Prior Period
Couldn’t be estimated in Prior Periods
How is a change from a non-GAAP accounting method to a GAAP method recorded?
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
How does an inventory error effect the financial statements?
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.
How is a change in entity recorded?
Applied retrospectively.
All prior periods presented for comparative purposes must reflect the change
Footnote disclosures must be made
Changing to Consolidated Statements
What are three types of accounting changes? Pg. 18-1
*What is a correction of an error / prior period adjustment
1) Change in accounting principle (retrospective => go back and restate / adjust); change from GAAP to GAAP (ie FIFO to LIFO)
2) Change in accounting estimate (prospective => DO NOT GO BACK; only today and tomorrow); (ie change in depreciation)
* This should be picked if cannot determine if change in principle or change in estimate
3) Change in reporting entitity (retrospective)
*A correction of a BooBoo; a change from Non-GAAP to GAAP (cash to accrual); retroactive adjustment
How does a statement of retained earnings look like?
Pg. 18-5
Beginning RE \+/- Prior period adjustment (net of tax) => RETAINED EARNINGS adjustment = Adjusted beginning RE \+ Net income - Dividends = Ending retained earnings
What should be in the footnote disclosure for a change in accounting principle? Pg. 18-1
Describe the methods of applying principles, and an unusal or innovative principles the client is using; look foor criteria
For related parties, what has to be disclosed and what doesnt have to be? Pg. 18-7
Disclosed: An agreement from another company; if a company has significant influence over another company
Not Disclosed: Regular expenses such as employee expenses which occurs in the ordinary course of business
