F1 M6

Question 1

3 types of RE adjustments:

Answer 1

3 types of RE adjustments: Prospective (does not affect RE directly, it has to do
w/estimates), retrospective (change in principle or entity), and restatement (error or prior
period adjustment)

Question 2

Changes in estimate affects…

Answer 2

Changes in estimate affects CURRENT and FUTURE year income (it NEVER affects the
past or RE; it is prospective)

Answer 3

If a change in accounting estimate affects several future years (ex: change in useful
life/depr or there is settlement of litigation) then it must be included in the notes (changes in estimates that regularly occur throughout the year every year do not have to be
disclosed)

Question 4

What type of approach is change in accounting principle?

Answer 4

Change in accounting principle is a retrospective approach (can ONLY switch from
GAAP TO GAAP; Non-GAAP to GAAP is an error)

Question 5

Accounting principle may be changed only if what?

Answer 5

Accounting principle may be changed only if required by GAAP (ex: a newly issued
codification update) or if the alternative principle is preferable and more fairly presents
the info (changes in accounting principle to SMOOTH income is not allowed)

Question 6

Two exceptions in changing accounting principle:

Answer 6

Two exceptions in changing accounting principle: if changing depr methods OR if
switching TO LIFO (these would be a change in estimate and no change in RE would be
necessary)

Question 7

How do you calculate Cumulative effect change in accounting principle

Answer 7

Cumulative effect: Adjust beginning RE net of tax (ADJUSTMENT x (1-T)) in the earliest
year presented

Question 8

Ex:

Answer 8

Ex: A comp changes to weighted avg inv method from using FIFO. The weighted avg inv
is now worth 200,000 more. I would do 200,000 (1-tax rate) to recognize the gain in RE

Question 9

When shouldn’t accounting change be made for a transaction or event from the past?

Answer 9

An accounting change shouldn’t be made for a transaction or event in the past that has
been terminated or is nonrecurring

Answer 10

Changes in accounting entity is retrospectively adjusted

Question 11

When does change in accounting entity occur?

Answer 11

Change in accounting entity occurs when the entity has changed composition

Answer 12

If there is a new entity added in a company and the company is either using
consolidated or comparative financial statements, then the financial statements must be
adjusted for the prior years shown on the FS’s and for the CY

Question 13

How are error corrections treated?

Answer 13

Error correction (prior period adjustment) is RESTATED

Answer 14

These include corrections of errors, mistakes made in applying GAAP, and changing
from NON-GAAP TO GAAP (ex: changing from cash basis to accrual basis - FS
never should’ve been in cash basis, so it’s always an error correction)

Answer 15

If an error is discovered to have been made in the past, then it must be corrected in that
year and if that year is no longer shown on the comparative FS’s, then it must be
corrected in the earliest year shown on the comparative financial statements

Answer 16

If comparative FS’s are not presented, then the error correction should be reported as an
adjustment to the beg balance of RE (net of tax)

Answer 17

Retrospective changes: All earliest FS must be changed/edited

Answer 18

Restatement changes: Only the year the error occurred must be restated (changing RE
in that year will flow through to the years after the error occurred)

Answer 19

If a change in accounting estimate can’t be distinguished from a change in accounting
principle, the change is considered a change in estimate and should be reported as a
component of income from continuing ops (GAAP prefers change in estimate)

Answer 20

IF ending INV IS UNDERSTATED, THIS MEANS THAT TOO MUCH COGS WAS
REPORTED IN THE PERIOD, THEREFORE IT IS OVERSTATED

Answer 21

IF ending INV IS OVERSTATED, THIS MEANS THAT TOO LITTLE COGS WAS
REPORTED, SO IT IS UNDERSTATED

Answer 22

If beg inv is overstated, this means that COGS was overstated

Answer 23

If beg inv is understated, this means that COGS was understated

Answer 24

If there is an error made in depr exp (it was recorded too high), then I have to debit acc
depr and credit retained earnings (make it higher)

Answer 25

If there is a change from fair value method to equity method, then this does not qualify
as a change in estimate OR a change in principle. It is simply accounted for right when it
happens

Answer 26

If COGS is overstated, I must add the amt that it was overstated to income from
continuing operations

Question 27

Equation of COGS

Answer 27

BI + purchases = COGA4S - ending inv = COGS