Accounting Changes and Error Correction

Question 1

Treatment for Change in Accounting Policy

Answer 1

1. Transitional Provision
2. Retrospectively (adjust beginning RE)
3. Prospectively

Question 2

What if unclear between accounting estimate or accounting policy?

Answer 2

treat as accounting estimate

Question 3

Prior Period Error vs Current Period Error

treatment

Answer 3

Prior Period - retrospective (adjust beg RE) = correcting as if it never happened

Current Period - prospective (adjust P/L)

Question 4

These errors are confined in the income statement only because it is an error between two income statement accounts.

What is the effect in P/L?

Answer 4

Income Statement (no effect in P/L)

Question 5

Counterbalancing vs Noncounterbalancing

IPADS

Answer 5

Counterbalancing (IPADS)
- Inventory
- Prepayment
- Accruals
- Deferrals (Income / Expense)
- Sales

Noncounterbalancing
- Depreciation
- Bad Debts

Question 6

If an asset (e.g. Ending Inventory) is understated, net income is

Answer 6

understated (direct)

Question 7

If a liability is overstated, net income is

Answer 7

understated (inverse)

Question 8

What to remember in Purchase and Ending Inventory?

Answer 8

Both wrong - Balance sheet error (no P/L)
Only one wrong - will affect net income

Question 9

In 2024, ending inventory is overstated. What will happen to the 2025 Net Income and Retained Earnings?

Answer 9

Net Income - Understated

Retained Earnings - Correct

Question 10

In 2024, depreciation expense is understated. What will happen to the 2025 Net Income and Retained Earnings?

Answer 10

Net Income - Correct
Retained Earnings - Overstated