Accounting Changes and Error Corrections

Question 1

Cash basis to accrual basis

Answer 1

As a prior period adjustment (net of tax), by ADJUSTING the beginning balance of Retained Earnings.

Question 2

Change in Revenue Method of Long term construction contracts from a point in time to over a period of time is considered a change in _________________

Answer 2

Accounting principle - Retrospectively and adjusting the values of CIP and Retained Earnings.

Question 3

Accounting changes are measured as of the beginning of the year of change.

Answer 3

E.g. FIFO to weighted avg (only beginning balance to be considered after tax)

Question 4

Permanent difference have no effect on deferred taxes

Answer 4

True

Question 5

Correction of a mathematical error in the calc of prior years’ depreciation be recorded

Answer 5

As a prior period adjustment. In this case, the mathematical error is an accounting error, not an accounting change (ie. accounting principle or estimate) . Because the error was discovered in a subsequent year, the company should prepare a prior period adjusting entry which will adjust the beginning R/E balance.

Question 6

If the error is discovered during the same year and the financial statements have not been issued, the error may be corrected by ________________

Answer 6

Recording the appropriate adjusting entry (SAME YEAR error) even after statements were issued. The financial statements are restated within the same year.

Question 7

SUBSEQUENT YEAR ERROR - However if the error is discovered in a subsequent year and affected the income statement, a prior period adjustment (net of tax) is required. Instead of making an adjusting journal entry in the current period, BEGINNING RETAINED EARNINGS (RE) is adjusted because the PRIOR PERIOD’S NET INCOME was closed to R/E. The adjustment would generally correct the error by INCREASING OR DECREASING BEGINNING R/E and adjusting the appropriate BALANCE SHEET account (e.g. Accumulated Depreciation)

Answer 7

SUBSEQUENT YEAR ERROR - Beginning Retained Earnings is adjusted.

Question 8

Failing to report Depreciation overstates _____________

Answer 8

Net Income and assets in the balance sheet

JE

Depreciation Expense XXX —–Overstates Net Income
Accumulated Depreciation XXX —–Overstates Assets

Question 9

A change due to a change in ownership, such as a business combination reported under the acquisition method, is NOT a change in reporting entity.

Answer 9

True

Question 10

A change in reporting entity is applied __________

Answer 10

retrospectively

Question 11

If the error impacts OCI rather than net income, adjustment will be made to beginning AOCI (net of tax)

Answer 11

True

Question 12

The cash basis of accounting is not acceptable under GAAP. Therefore, the change to the accrual basis is a change from an unacceptable method or basis of accounting to an acceptable method or basis. Such a change is treated as an error correction, which is reported as a prior period adjustment.

Question 13

Correct overstatement of Inventory

Answer 13

Inventory errors correct themselves after 2 Years. At the end of Year 2, Ending inventory and RE are correct. Year 1 (not correct). Starting in Year 3, beginning inventory will be correct . Therefore, COGS and net income are also correct. No adjustments are needed in Year 3.

Question 14

FASB ASC 250, accounting changes include a change in accounting principle, a change in an accounting estimate and a change in a reporting entity.

Answer 14

True. The correction of an error in previously issued financial statements is not an accounting change.

Question 15

Point in time to Over time - Contracts

Answer 15

Change in accounting principle - retrospectively

Question 16

Cash to Accrual

Answer 16

Error Correction (Retroactive)

Question 17

ASC 323 - When an investment qualifies for the equity method (has significant influence), it is neither an accounting change nor an accounting error and should be applied on a ___________________

Answer 17

Prospective basis

Question 18

Switch from percentage of Sales to an aging of receivable analysis in estimating credit losses

Answer 18

Change in estimate, prospectively

Question 19

A self-correcting error would require an adjustment to correct comparative year financial statements. Adjustments to comparative years should be made to reflect retroactive application of the prior period adjustment to the accounts affected.

Answer 19

It will not be considered as corrected itself in the current year and would require an adjustment

Question 20

Contracts - Long term contracts to % of completion method

Answer 20

Change in Accounting principle, retrospective Application approach

Question 21

When Depreciation has been overstated, pass a journal entry

Answer 21

Accumulated Depreciation XXXXXXX
Retained Earnings XXXXXXXX

Question 22

Accounting errors requiring corrections

Answer 22

1. Mathematical errors
2. Mistakes in applying GAAP
3. Change from a non-GAAP principle to a GAAP Principle
4. Omission of material information

E.g. The correction of a mathematical error in the calculation of prior years’ depreciation.

WHen an error is discovered, the prior F/S are restated.

Recording a prior period adjustment to the opening balance of retained earnings or accumulated OCI.

Question 23

A change in the method of applying an accounting principle, such as a change from the individual item approach to the group approach for evaluating the lower of cost or market price of inventory is accounted for through retrospective application to the extent it is practicable

Answer 23

RETROSPECTIVE

Question 24

INDIRECT EFFECTS of a change in ACCOUNTING PRINCIPLE should be reported in the period in which the accounting change occurs.

Answer 24

DIRECT effects are reported in the periof in which the accounting change occurs. Direct effects are reported retrospectively to the earliest period presented, if practicable.

Question 25

% completion

Answer 25

Cost to date/Total estimated costs

Question 26

% completion profit

Answer 26

Total contract price - Total estimated costs

Question 27

Change in accounting principle, Retrospective

Answer 27

1. Inventory valuation method
2. Long term contract revenue recognition (over time vs. In time)

Question 28

Change in accounting estimate - Prospective

Answer 28

1. Credit losses
2. Inventory Obsolescence
3. Sales returns and allowances
4. Salvage values of depreciable assets
5. Warranty obligations
   exception : Change to LIFO, Prospectively (PL - acronym to remember)

Question 29

Change in reporting entity-Restrospective

Answer 29

Consolidated F/S instead of individual F/S
Changing the specific subsidiaries presented in consolidated F/S

Question 30

Error correction, prospectively

Answer 30

1. Cash to Accrual
2. Accelerated depreciation to SL Dep

Question 31

Prospectively

Answer 31

FV to equity method
or No significant influence to significant influence
CHANGE TO LIFO

Question 32

Error correction

Answer 32

GAAP to NOn-GAAP