F2 - Accounting Changes and Error Corrections

Question 1

Which of the following statements is correct as it relates to changes in accounting estimates?

Answer 1

If a change in accounting estimate cannot be distinguished from a change in accounting principle, the change is considered a change in accounting estimate treated as a change in accounting estimate and is accounted for prospectively.

Question 2

Examples of Changes in Accounting Estimates

Answer 2

• Changes in DEPRECIATION
  -Changes in USEFUL LIFE
  -uncollectible estimates receivables
• Warranty
  -Pending litigation(law)
• change in inventory LIFO
  (Prospective - expecting or expected something particular in FUTURE)

Question 3

Lore Co. changed from the cash basis of accounting to the accrual basis of accounting during the current year. The cumulative effect of this change should be reported in Lore’s current year financial statements as a:

Answer 3

The cash basis for financial reporting is not a generally accepted accounting basis of accounting (GAAP); therefore, it is an error. Correction of an error from a prior period is a reported as prior period adjustment to retained earnings.

Question 4

What is Change in Accounting Principle?

Answer 4

Changes made from GAAP method of accounting to other GAAP methods(Retrospective)

Question 5

Examples for Change in Accounting Principle

Answer 5

• Will be made of net of tax (cummilative effect X (1-Tax Rate))
• Retrospective - looking past years and adjusting previous year with new method
• Weighted average to FIFO
• LIFO to FIFO

Question 6

What is a Change in Accounting Error?

Answer 6

• GAAP to Non-GAAP(accrual to cash)
• Mathematical Error
• Oversight
• Bad Faith(errors by management)
• Retrospective (backwards to prior periods) so net of tax calculations (1-Tax Rate)

Question 7

Split milk Inc. it presenting comparative financial statements for Year 2 and 3. When presenting the comparative financial statements in Year 3. the compony discovered o mathematical error In recording soles for Year 1 and 2 that resulted in on overstatement of net income in the amount of $50.000 per year. Assuming the compony reported net income in the amount of 1500,000 and $750.000 In Year 2 and 3. respectively, and the compony has a 30% tax rate for both years, determine how Split milk make and adjustment to the errors mode in previous periods and how net income should be reported for the Years presented;

Answer 7

• Step 1: Determine necessary adjustments (net of tax) year2 $50000X(1-.30) =$35000 year 3 no adjustment
• Step 2: Net Income - YR2 $500K-35K=465K YR3 no adj 750K
• Step 3: Adjust Beg RE earliest presented YR2 $35000

Question 8

The cumulative effect of a change in accounting principle is reported (LIFO to FIFO)

Answer 8

net of tax as an adjustment to beginning retained earnings in the earliest year presented.

Question 9

What would require restatement of prior years’ financial statements?(change in error correction)

Answer 9

A change from the income tax basis of accounting to the accrual basis.