ACCOUNTING CHANGES Flashcards
What accounting approach is applied to corrections of errors affecting prior year net income?
Accounting approach applied is retrospective.
How many years should be considered in the journal entry to correct retained earnings?
All years affected by the error through the beginning of the year of change.
What financial statement errors will remain if an error counterbalances?
All account balances affected by the error are still erroneous, except for retained earnings.
How many years should be considered when computing the adjustment to the earliest year in the retained earnings statement?
All years before the earliest year in the statement affected by the error.
Define “prior period adjustment.”
Change in retained earnings for error corrections.
What is the change in retained earnings for an error correction called?
Prior period adjustment.
Define “counterbalancing error.”
An error whose effect on retained earnings automatically corrects itself after a number of years.
What happens to the net book value of the asset?
Depreciated or depleted.
List the components of asset retirement obligation (ARO) costs.
Costs to dismantle, reclaim, remove, etc.
What amount does the asset retirement obligation increase to over time?
The final amount expected to be paid.
How is the annual accretion expense and corresponding increase to asset retirement obligation (ARO) found?
Multiplying the interest rate used in capitalizing the initial amount, by the beginning balance in the ARO.
How much is capitalized to the asset retirement obligation?
The present value of the estimated future payments (initial fair value).
When does an environmental liability need to be accrued?
When the liabilities are both probable and reasonably estimable.
What accounting approach is applied to changes in depreciation method?
Prospective
What is the amount of cumulative effect recorded for change in depreciation method?
None (prospective approach is applied).
What disclosures are required for estimate changes?
Effect of the change on income from continuing operations and net income for the year of change.
How is a change in depletion method accounted for?
Prospective approach (same as estimate change).
What is the rationale for applying the prospective method to estimate changes?
The new information triggering the change is not applicable to prior years.
What is the most frequent type of accounting change?
Estimate change.
What is the first computation in accounting for an estimate change involving a depletable resource?
Compute book value at the beginning of the year of change.
What accounting change is often impracticable to compute a cumulative effect?
Change to Last In First Out (LIFO).
What account records the effect of principle change on prior years?
Retained earnings.
What account is debited when an accounting principle change causes income in prior years to decrease?
Retained earnings (cumulative effect of change).
What is the amount recorded for the change in deferred taxes for a change in accounting principle?
The pretax cumulative effect multiplied by the tax rate.
What is the amount of the cumulative effect reported in the earliest reported year of the retained earnings statement?
The effect of the change on years before the earliest year reported.
What is the pretax amount of the cumulative effect of a change in inventory method?
The difference in inventory balance for the new and old methods, at the beginning of the year of change.
How is a change in method that is indistinguishable from a change in estimate accounted for?
Change in estimate.
What type of changes and events are comparative financial statements of prior periods changed for?
Accounting principle changes and error corrections.
What accounting approach is used for a change in reporting entity?
Retrospective method.
What is a change in accounting principle?
A change from one generally accepted accounting principle to another when there are at least two acceptable principles or when the current principle used is no longer generally accepted.
What accounting approach is applied to error corrections?
Retrospective (Restatement).
What accounting approach is applied to estimate changes?
Prospective.
What accounting approach is applied to principle changes?
Retrospective
What concept is displayed when there is restatement of prior year financial statements?
Comparability
List the three types of accounting changes.
- Change in accounting principle;2. Change in accounting estimate;3. Change in reporting entity.
What is the date of application used by firms for accounting changes?
First day of the year of change.
List the two accounting approaches for recording accounting changes.
- Retrospective;2. Prospective.
