Accounting Changes and Error Corrections Flashcards
Cash basis to accrual basis
As a prior period adjustment (net of tax), by ADJUSTING the beginning balance of Retained Earnings.
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 _________________
Accounting principle - Retrospectively and adjusting the values of CIP and Retained Earnings.
Accounting changes are measured as of the beginning of the year of change.
E.g. FIFO to weighted avg (only beginning balance to be considered after tax)
Permanent difference have no effect on deferred taxes
True
Correction of a mathematical error in the calc of prior years’ depreciation be recorded
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.
If the error is discovered during the same year and the financial statements have not been issued, the error may be corrected by ________________
Recording the appropriate adjusting entry (SAME YEAR error) even after statements were issued. The financial statements are restated within the same year.
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)
SUBSEQUENT YEAR ERROR - Beginning Retained Earnings is adjusted.
Failing to report Depreciation overstates _____________
Net Income and assets in the balance sheet
JE
Depreciation Expense XXX —–Overstates Net Income
Accumulated Depreciation XXX —–Overstates Assets
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.
True
A change in reporting entity is applied __________
retrospectively
If the error impacts OCI rather than net income, adjustment will be made to beginning AOCI (net of tax)
True
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.
Correct overstatement of Inventory
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.
FASB ASC 250, accounting changes include a change in accounting principle, a change in an accounting estimate and a change in a reporting entity.
True. The correction of an error in previously issued financial statements is not an accounting change.
Point in time to Over time - Contracts
Change in accounting principle - retrospectively
Cash to Accrual
Error Correction (Retroactive)
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 ___________________
Prospective basis
Switch from percentage of Sales to an aging of receivable analysis in estimating credit losses
Change in estimate, prospectively
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.
It will not be considered as corrected itself in the current year and would require an adjustment
Contracts - Long term contracts to % of completion method
Change in Accounting principle, retrospective Application approach
When Depreciation has been overstated, pass a journal entry
Accumulated Depreciation XXXXXXX
Retained Earnings XXXXXXXX
Accounting errors requiring corrections
- Mathematical errors
- Mistakes in applying GAAP
- Change from a non-GAAP principle to a GAAP Principle
- 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.
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
RETROSPECTIVE
INDIRECT EFFECTS of a change in ACCOUNTING PRINCIPLE should be reported in the period in which the accounting change occurs.
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.
