F2: Accounting changes & Error Corrections

Question 1

When does a change in accounting estimate occur

Answer 1

When it’s determined that the estimate previously used by the company is incorrect

Question 2

Events that result in a change in Estimate:

Answer 2

1. Change in lives of fixed assets
2. Write downs of obsolete inventory
3. Material, nonrecurring IRS adjustments
4. Settlement of litigation
5. Adjustments of year-end accrual of officers salaries and/or bonuses
6. Revisions of estimates regarding discontinued operations
7. Changes in accounting principle that are inseparable from a change in estimate (change in installment method to immediate recognition method bc in collectible accounts can now be estimated)

Question 3

Rule: changes in estimates affect only the ________ & _______ periods

Answer 3

Current and subsequent
(Not prior periods & not retained earning)

Question 4

Accounting changes that are, in effect, the statements of a different reporting entity should be
- disclosed in notes
- restated
- no change made

Answer 4

FS of ALL prior periods should be Restated

Question 5

Financial statements of all prior periods should be restated when there’s a change in entity due to

Answer 5

1. Changing companies in consolidated FS
2. Consolidated FS vs. Previous individual FS

Question 6

When are cumulative effect adjustments reported

Answer 6

In Retained Earnings in the year of change

Question 7

A change from cost method to equity method requires

Answer 7

Restatement

Question 8

A change from equity method to cost method

Answer 8

Does not require restatement, is accounted for prospectively

Question 9

When the effect of a change in accounting principle is inseparable from the effect of a change in accounting estimate, reporting treated for the overall effect is:

Answer 9

Reporting treatment for the overall effect is a change in accounting estimate and the effect is reported prospectively as a component of continuing operations

Question 10

What is the reporting treatment for l correction of an error

Answer 10

Retroactive treatment as a prior period adjustment to retained earnings with restatement of prior periods

Question 11

Whenever it is impossible to determine whether a change in accounting estimate or a change in accounting principle has occurred, the change should be considered as a:

Answer 11

Change in accounting estimate and accounted for prospectively

Question 12

What years are affected by a change in accounting estimate?

Answer 12

The current year and future years of the change affects both.

Question 13

A change in useful life of an asset represents a change in

Answer 13

Accounting estimate and is handled prospectively

Question 14

In what year is a a change in accounting estimate accounted for?

Answer 14

In the current year and future years if the change affects both

Question 15

If comparative financial statements are presented, the cumulative effect of a change in accounting principle is presented:

Answer 15

Net of tax, as an adjustment to retained earnings in the statement of stockholders equity.

Question 16

How is the cumulative effect of a change in accounting principle for periods NOT in the comparative financial statements accounted for?

Answer 16

Accounted for within retained earnings

Question 17

When there’s a change in reporting entity, how should the change be reported in the financial statements?

Answer 17

Retrospectively, including note disclosures & application to all prior FS presented

Question 18

Under GAAP, the cash basis for financial reporting should be treated as an __________ and correction of _________ is reported _________

Answer 18

Error; errors; as a prior period adjustment to retained earnings

Question 19

The correct of an error in the financial statements of a prior period should be reported:

Answer 19

Net of tax, in the current statement of retained earnings as an adjustment of the opening balance.

Question 20

Exclusion of merchandise is an _______ that requires an adjustment to

Answer 20

Accounting error, beginnings retained earnings (prior period adjustment)

Question 21

Depreciation expense should reflect the appropriate expense amount

Answer 21

The appropriate expense amount for the current year