Accounting Errors - Restatement

Question 1

How is an error caused in a financial statement?

Answer 1

Caused when information existed at the time the statements were prepared enabling correct reporting, but a misstatement was made causing erroneous recognition, measurement, or disclosure.

Question 2

What is a change from an inappropriate accounting principle to one that is generally accepted called?

Answer 2

an Error

Question 3

How is an error correction treated?

Answer 3

1. ) Financials Restated
2. ) Effect of error correction on periods before those presented is reflected in the affected real accounts as of the beginning of the earliest period presented, including an adjustment to the opening balance of RE (PP adjustment)
3. ) Financials for prior periods presented comparatively are recast to reflect the effect of the error correction
4. ) Through a journal entry, the beginning balance of RE in the year of the correction is adjusted to reflect the correct accounting through that date (PP adjustment)

Question 4

What disclosures are required for error corrections?

Answer 4

1. ) statement that previous financials were restated and the nature of the error
2. ) Effect of the correction on each financial statement line item and related per share amounts for each PP adjustment
3. ) Total cumulative effect of the change on RE as of the beginning of the first period presented
4. ) Pre and post-tax effects of the correction on NI for each prior period presented.

Question 5

Define “prior period adjustment.”

Answer 5

Change in retained earnings for error corrections

Question 6

How many years should be considered in the journal entry to correct retained earnings?

Answer 6

All years affected by the error through the beginning of the year of change

Question 7

Define “counterbalancing error.”

Answer 7

An error whose effect on retained earnings automatically corrects itself after a number of years

Question 8

What financial statement errors will remain if an error counterbalances?

Answer 8

All account balances affected by the error are still erroneous, except for retained earnings