Chapter 22-Accounting Changes and Error Analysis

Question 1

Change in accounting estimate

Answer 1

A change that occurs as the result of new information or as additional experience is acquired.

Question 2

Change in accounting principle

Answer 2

A change from one generally accepted accounting principle to another generally accepted accounting principle.

Question 3

Change in reporting entity

Answer 3

A change from reporting as one type of entity to another type of entity.

Question 4

Counterbalancing errors

Answer 4

Errors that will be offset or corrected over two periods.

Question 5

Current adjustment

Answer 5

The cumulative effect of the use of the new method on the financial statements at the beginning of the period is computed and is reported in the current year’s income statement as an irregular item.

Question 6

Errors in financial statements

Answer 6

Errors occur as a result of mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time financial statements were prepared.

Question 7

Noncounterbalancing errors

Answer 7

Errors that are not offset in the next accounting period.

Question 8

Pro-forma statements

Answer 8

Supplementary statements that are shown on an “as if” basis.

Question 9

Prospective adjustment

Answer 9

Previously reported results remain; no change is made. Opening balances are not adjusted, and no attempt is made to allocate charges or credits for prior events.

Question 10

Retrospective adjustment

Answer 10

The cumulative effect of the use of the new method on the financial statements at the beginning of the period is computed and the prior years’ financial statements are recast on a basis consistent with the newly adopted principle.