Accounting Changes and Error Correction Flashcards
How should correction of an error in the financial statements in a prior period be reported?
- The correction of an error in the financial statements of a prior period should be reported, net of tax in the current statement of retained earnings as an adjustment to the opening balance if the year is not presented.
- Correct the information if the year is presented
If comparative financial statements are presented and the FS with the error are presented, merely correct the error in those prior statements
How is the cumulative effect of a change is accounting principle reported?
A cumulative effect of a change in accounting principle is shown as an adjustment to beginning retained earnings.
eg. change from FIFO method of inventory valuation method to the weighted-average method
How is a change from LIFO to weighted average treated?
Or a change from LIFO
The cumulative effect is computed and the change is handled retrospectively.
That is a change in accounting principle and is reported as an adjustment to retained earnings when it is considered practical to calculate the cumulative effect.
How is a change from weighted average to LIFO treated?
No cumulative effect adjustment is made. The change is accounted for prospectively.
Under U.S. GAAP, when making a change to LIFO, is generally considered impracticable to calculate the cumulative effect of the change.
What should be done when a change in accounting estimate cannot be distinguished from a change in accounting principle?
If a change in accounting estimate cannot be distinguished from a change in accounting principle, the change is considered a change in accounting estimate, treated as a change in accounting estimate and accounted for prospectively.
How should a change in depreciation method be reported?
eg. sum-of-years digits depreciation to straight-line depreciation.
A change in depreciation method is now considered to be both a change in method and and change in estimate. These changes should be accounted for as a change in estimated and handled prospectively.
How should a change is reporting entity reported in the financial statements?
Retrospectively, including note disclosures, and application to all prior period financial statements presented.
If comparative financial statements are presented, all previous FS that are presented in the comparative FS should be restated.
RESTATEMENT
How should a change form cash basis of accounting to accrual basis of accounting be reported?
The cash basis of financial reporting in not a general accepted account basis of accounting (GAAP); therefore, it is an error.
Correction of an error from prior period is reported as prior period adjustment to retained earnings.
Non-GAAP to GAAP is an error
What Is a change from LIFO to FIFO for inventory valuation (costing)
A change from LIFO to FIFO for inventory valuation (costing) is a change in accounting principle
the cumulative effect should be shown as
an adjustment should be made to retained earnings.
What is the result of the understatement of ending inventory?
An understatement of ending inventory results in an overstatement of cost of goods sold an an understatement of net income.
To correct that error, beginning retained earnings must be increased on an after-tax basis.
How are prior period adjustments for comparative financial statements reported?
For comparative financial statements, prior period adjustments require retroactive treatment for the years presented.
e. g -comparative FS for year 2 and year 3
if there is an error in year 1, because it is not presented, the error would be corrected in year 2.
How is change from LIFO to FIFO treated?
A change to LIFO is a change in accounting principle where it is considered “Impractical” accurately calculate and is handled prospectively.
The impact will be in the current year rather than in previous years.
How do you treat a change in estimate?
Prospectively- affects current and future income from continuing operation.
It’s not an error.
Do not restate prior years
eg.
1. change in lives of fixed assets
2. adjustments to year end accruals of salaries/bonuses
3. write down of obselete inventory
4. material, nonrecurring IRS adjustments
5. Settlement of litigation
6. changes in accounting principles that are inseparable from a chnage in estimate e.g change to LIFO
7. revisions of estimates regarding discontinued operations
Rule of Preferability
When should an accounting principle be changed?
An accounting principle may be change “only” if required by GAAP or if the alternative principle is preferable and more fairly represents the information.
