ACCT 343 Final Flashcards
Types of accounting changes
changes in…
Accounting principle
accounting estimate
reporting entity
3 approaches for reporting changes:
retrospective- must adjust RE and restate prior financial statements.
Modified retrospective
Prospective- only current and future years affected.
Changes in Accounting principles? making the change requires two steps:
- Calculate the cumulative effect of the accounting change and adjust the beginning balances of retained earnings and any affected assets/liabilities.
- restate any prior years financial statements shown to reflect the new accounting principle (i.e.as if the new principle had been used all along).
Change in accounting principle? Retrospective/Prospective
Retrospective- as far back as practicable.
Prospective- worst case scenario
disclosure is required in the footnotes in the year of the change in justify the change to the new accounting method.
Change in accounting estimate
Many accounting situations involve estimates.
- uncollectible receivables, inventory obsolescence, PBO, Liabilities for warranty costs and income taxes, recoverable mineral reserves, useful lives and salvage values of assets. HANDLED prospectively.
Change in reporting entity:
change in the definition of the entity covered in the financial statements.
- change in the composition of subsidiaries in consolidated financial statements.
- mergers and acquisitions.
HANDLED RETROSPECTIVELY- all previous periods FS shown are restated as if the “new” reporting entity existed the whole time.
Footnote disclosure is required to describe the nature of the change and the reason it occurred.
Accounting Error Correction:
All material errors must be corrected.
Record corrections of errors from prior periods as an adjustment to the beginning balance of RE in the current period.
- called prior period adjustments.
- for comparative statements, need to restate the prior statements affected to correct the error.
Accounting Error Analysis:
the exact process to correct an error will depend on the type of error, when the error occurred, and when the error was discovered.
Types of error include:
- Balance Sheet errors
- I/S errors
- B/S and I/S errors
- Counterbalancing
- Non-counterbalancing
Format of the SCF:
Order of the SCF: Operating, Investing, Financing
The net increase or decrease in cash shown on the SCF for the period should be reconciled to the change in cash on the BS.
Preparation of the SCF:
Not prepared from the adjusted trial balance.
Information obtained from several sources:
- comparative balance sheets
- current income statements, and
- selected transaction data
Determining Operating Cash Flows:
Indirect vs Direct Method
Indirect- start with accrual basis net income and then adjust (add/subtract) all non-cash items on the income statement. Also, adjust for changes in key (operating) balance sheet accounts.
Direct- calculate cash inflows/outflows from specific categories (i.e. cash collections from customers, to suppliers, etc).
If direct method is used, FASB requires indirect method also.
Definition of Indirect and direct:
Indirect- start with accrual basis net income and make a series of adjustments to derive total cash flows from operating activities.
Direct-Convert each accrual item on the income statement to an individual cash received/paid amount.
Cash Flows and Multidirectional Activity:
Balance sheet accounts involved in the analysis of cash flows can have activity going in both directions.
The change in PP&E may reflect both purchases and sales of
assets. the change in long-term notes payable may reflect both
new borrowings and repayments of debt. THIS WILL BE TOLD
Activities in opposite directions within an account are treated as separate cash flow items.
Must be provided with “additional information” to identify; cannot
fully identified from financial statements alone.
Non-Cash Transactions:
Significant financing and investing activities that do not affect cash are reported in either a separate schedule at the bottom of the SCF or in the notes.
Examples include:
issuance of debt to purchase assets
issuance of common stock to purchase assets
exchanges of long-lived assets
conversion of bonds into common stock
non-cash transactions are disclosed at the bottom.
What is the pension obligation/liability?
What is pension expense?
Obligation: PV of cumulative expected future benefit payments. netted against the FV of the assets set aside for the pension.
Expense: current year change in the net pension obligation
