Accounting Changes and Error Corrections Flashcards
Changes in Accounting Estimates are accounted for how?
Changes in Accounting Estimates occurs when it is determined that the estimate previously used the by the company is incorrect. Changes in accounting estimate are accounted for prospectively (implement in the current period and continue in future periods.
What are some examples of Changes in Accounting Estimates?
Changes in lives of fixed assets, adjustments of year end accruals, write downs of obsolete inventory, material non recurring IRS adjustments, settlement of litigation, change in account principle that are inseparable from a change in estimate (change from the installment method to the immediate recognition method because uncollectible accounts now can be estimated), revisions of estimates regarding discontinued operations.
How are Changes in Entity accounted for?
Restatement. Financial statements of all prior periods should be restated when there is a Change in Entity such as resulting from:
1) Changes in companies consolidated financial statements.
2) Consolidated financial statements versus previous individual financial statements.
What happens when there is a change in accounting principle that is inseparable from the effect of a change in accounting estimate?
The effect of the change is reported prospectively as a component of income from continuing operations.
What happens to Net Income when Ending Inventory is understated?
An understatement of ending inventory results in an overstatements of cost of goods sold and an understatement of net income. To correct the understatement of prior period net income, beg retained earnings must be increased on an after tax basis for the amount of ending inventory understatement.
What happens to Net Income when Ending Inventory is overstated?
An overstatement of ending inventory results in an understatement of Cost of Good Sold and an overstatement of Net Income.
Explain why the cumulative effect of a change in accounting estimate should NOT be shown separately on financial statements.
A change in estimate is handled prospectively. No cumulative effect adjustment is made and no separate line item presentation is made on any financial statement. If a material change is being made, appropriate footnote disclosure is necessary.
How should the effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate be reported?
AS A COMPONENT OF INCOME FROM CONTINUTING OPERATIONS.
When the effect of a change in inseparable, the treatment of the change in reported in continuing operations.
