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Financial Acct Systems 2 > Ch 22 > Flashcards

Ch 22 Flashcards

0
Q

Change in accounting principle

A

Change in one generally accepted accounting principle
to another

Ex. Company changes inventory valuation from LIFO to
Avg. cost

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1
Q

FASB established reporting framework for 3 types of accounting changes

A

1 change in accounting principle

2 change in accounting estimate

3 change in reporting entity

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2
Q

Change in accounting estimate

A

Change that occurs as result of new information or
Additional experience

Ex. Company may change its estimate of useful lives of
Depreciable assets

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3
Q

Change in reporting entity

A

Change from reporting as one type of entity to another
Type of entity

Ex. Company may change the subsidiaries for which it
Prepares consolidated financial statements

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4
Q

4 category that necessitates changes in accounting, though it’s not classified as an accounting change

A

Errors in financial statements

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5
Q

Adoption of a new principle

A

Recognition of events that have occurred for first time
Or that were previously immaterial

Not an accounting change

Ex. Adopting inventory method for newly acquired items

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6
Q

3 possible approaches for reporting changes in accounting principles

A

1 report changes currently

2 report changes retrospectively

3 report changes prospectively

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7
Q

Report changes currently

A

Companies report cumulative effect of change in current
Year’s income statement as an irregular item

Effect of change on prior year’s income appears only in
Current year income statement

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8
Q

Cumulative effect

A

Difference in prior year’s income between newly adopted

And prior accounting method

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9
Q

Report changes retrospectively: Retrospective application

A

Refers to application of different accounting principle to
Recast previously issued financial statements

Recast as if new principle had always been used

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10
Q

Report changes prospectively

A

Principle applied to future financial statements

Current and past financial statements aren’t affected

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11
Q

Which of the 3 possible approaches for reporting changes in accounting principles does FASB prefer?

A

Retrospective approach

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12
Q

When a company changes an accounting principle, what are 2 ways it reports a change applying retrospective application?

A

1 it adjusts financial statements for each prior period
presented

2 it adjusts carrying amounts of assets and liabilities as
Beginning of first year presented

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13
Q

What happens to the cashflow statement, when accounting principle for reporting inventory is changed from FIFO to LIFO

A

It stays the same

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14
Q

Example of direct effect

A

Adjustment to inventory balance as result of change in

Inventory valuation method

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15
Q

Indirect effect

A

Any change to current or future cashflows of company that
Result from making change in accounting principle that’s
Applied retrospectively

Indirect effects do not change prior period amounts

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16
Q

Retrospective application is considered impracticable is a company…

A

Can’t determine prior period effects using reasonable efforts
To do so

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17
Q

Companies should not use retrospective application if 1 of the following 3 conditions exists

A

1 company can’t determine effects of retrospective application
2 retrospective application requires assumptions about
Management’s intent in prior period
3 retrospective application requires significant estimates
That can’t objectively be verified

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18
Q

When retrospective application is impracticable, what does a company apply?

A

Company prospectively applies new accounting principle

Of earliest date it’s practical to do so

19
Q

What 7 items require changes in future estimates?

A

1 uncollectible receivables
2 inventory obsolescence
3 useful lives and salvage values of assets
4 periods benefited by deferred costs
5 liabilities for warranty costs and income taxes
6 recoverable mineral reserves
7 change in depreciation methods

20
Q

How are changes in accounting estimates reported?

A

Reported prospectively

Viewed as normal recurring corrections and adjustments

21
Q

Calculating depreciation charge (equation)

A

Depreciation charge = book value of asset/remaining service life

22
Q

Companies account for a change in depreciation methods as a…

A

Change in estimate effected by a change in accounting

principle

23
Q

Changes in reporting entity: in such cases companies report Change by…

A

Changing financial statements of all prior periods presented

24
Q

4 examples in change of reporting entities

A

1 consolidated financial statements for individual companies
2 changing specific subsidiaries
3 changing companies in combined financial statements
4 changing cost, equity or consolidation method for
Subsidiary and investments

25
Q

Accounting error types: Expense recognition

A

Recording expenses in incorrect period or incorrect amount

26
Q

Accounting error types: revenue recognition

A

Improper revenue accounting, including questionable revenue

Recognized, misreported revenue

27
Q

Accounting error types: misclassification

A

Misclassifying significant items on BS, IS or Sof Cashflows

28
Q

Accounting error types: equity

A

Improper accounting for EPS, restricted stock, warrants

And other equity instruments

29
Q

Accounting error types: reserves/contingencies

A

Errors involving bad debts related to A/R, inventory reserves,
Income tax allowances, loss contingencies

30
Q

Accounting error types: long lived assets

A

Asset impairments of property, plant, equipment, goodwill

Or other related items

31
Q

Accounting error types: taxes

A

Errors involving correction of tax provision, improper

treatment of tax liabilities and other tax related items

32
Q

Accounting error types: equity-other comprehensive income

A

Improper accounting for other comprehensive income equity
Transactions

Includes foreign currency items, unrealized G/L on debt or
Equity or derivatives

33
Q

Accounting error types: equity-stock options

A

Improper accounting for employee stock options

34
Q

Other accounting errors would relate to…

A

Acquisitions or mergers

35
Q

Corrections of errors

A

Recorded as soon as found

Adjustment is made to beginning balance of retained
earnings in current period

36
Q

Prior period adjustments

A

Adjustment to beginning balance of retained earnings

In current period

37
Q

Restatement

A

Used for process of revising previously issued financial

Statements

38
Q

Reasons companies prefer certain accounting methods?

A

1 political costs
2 capital structure
3 bonus payments
4 smooth earnings

39
Q

Economic consequence arguments

A

Focus on impact of accounting method on behavior of
Investors, creditors, competitors, governments or company
Managers

40
Q

What is an important element of faithful representation?

A

Neutrality

41
Q

Counterbalancing errors

A

Those that will be offset or corrected over 2 periods

Ex. Failure to record accrued wages is counterbalancing
Error b/c over 2 yr. period error will no longer be present

42
Q

Non counterbalancing errors

A

Those that aren’t offset in next accounting period

Ex. Failure to capitalize equipment that has useful life of
5 years

43
Q

If a company has closed the books in the current year: If error is already counter balanced

A

No entry is necessary

44
Q

If a company has closed the books in the current year: if error is not yet counterbalanced

A

Make entry to adjust present balance of retained earnings

45
Q

If a company has not closed the books in the current year: If error is already counterbalanced

A

Make entry to correct error in current period

And adjust beginning balance of retained earnings

46
Q

If a company has not closed the books in the current year: if error is not yet counterbalanced

A

Make entry to adjust beginning balance of retained earnings

Financial Acct Systems 2 (22 decks)

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