Accounting Changes & Error Corrections Flashcards
Concept Questions
What type of change is a change of methods of inventory costing?
Change in accounting principle
What type of accounting change involves revising an estimate due to new information or experience?
Change in accounting estimate
Correcting a mathematical mistake is an example of:
An error correction
What is the primary advantage of the retrospective approach in accounting changes?
It achieves comparability among financial statements.
When using the retrospective approach, how are retained earnings adjusted?
Retained earnings are adjusted to the beginning balance of the earliest period reported in the comparative statements.
What is a potential disadvantage of the retrospective approach?
It may reduce public confidence in the integrity of financial data.
What does the modified retrospective approach require in terms of the application of a new standard?
Application of the new standard only to the adoption period.
How are cumulative effects of prior periods captured in the modified retrospective approach?
By adjusting the balance of retained earnings at the beginning of the adoption period.
Under to prospective approach, how are the effects of a change reflected in the financial statements?
In the financial statements of only the year of the change and future years.
The following statement is true regarding what approach?
“Changes are implemented in the period of the change and future periods only.”
Prospective Approach
Under the prospective approach, how are prior period financial statements affected?
They remain unchanged.
What is NOT required by the prospective approach?
Modification of prior years’ financial statements.
What is the process of allocating the cost of a tangible asset over its useful life?
Depreciation
When a company changes its depreciation method, how is this change reported?
As a change in estimate (prospectively)
Which depreciation method might a company use if it expects greater benefits in the earlier years of an asset’s life?
Accelerated Depreciation
When a company acquires another company, how are the financial statements of the acquirer affected?
The acquirer’s financial statements include the acquiree as of the date of acquisition.
What must be included in the financial statements when there is a change in reporting entity?
A restatement of prior period financial statements to reflect the new entity.
How are previous years financial statements corrected when an error is identified?
They are retrospectively restated.
When correcting an error that affects retained earnings, how is the correction reported?
As an adjustment to the beginning balance in a statement of shareholder’s equity.
Which approach is used for the correction of errors?
Retrospective Approach
What is a prior period adjustment?
An addition to or reduction in the beginning retained earnings balance
What is an example of an error that does not affect net income?
Recording salaries payable as accounts payable.
