F2: Accounting changes & Error Corrections Flashcards
When does a change in accounting estimate occur
When it’s determined that the estimate previously used by the company is incorrect
Events that result in a change in Estimate:
- Change in lives of fixed assets
- Write downs of obsolete inventory
- Material, nonrecurring IRS adjustments
- Settlement of litigation
- Adjustments of year-end accrual of officers salaries and/or bonuses
- Revisions of estimates regarding discontinued operations
- 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)
Rule: changes in estimates affect only the ________ & _______ periods
Current and subsequent
(Not prior periods & not retained earning)
Accounting changes that are, in effect, the statements of a different reporting entity should be
- disclosed in notes
- restated
- no change made
FS of ALL prior periods should be Restated
Financial statements of all prior periods should be restated when there’s a change in entity due to
- Changing companies in consolidated FS
- Consolidated FS vs. Previous individual FS
When are cumulative effect adjustments reported
In Retained Earnings in the year of change
A change from cost method to equity method requires
Restatement
A change from equity method to cost method
Does not require restatement, is accounted for prospectively
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:
Reporting treatment for the overall effect is a change in accounting estimate and the effect is reported prospectively as a component of continuing operations
What is the reporting treatment for l correction of an error
Retroactive treatment as a prior period adjustment to retained earnings with restatement of prior periods
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:
Change in accounting estimate and accounted for prospectively
What years are affected by a change in accounting estimate?
The current year and future years of the change affects both.
A change in useful life of an asset represents a change in
Accounting estimate and is handled prospectively
In what year is a a change in accounting estimate accounted for?
In the current year and future years if the change affects both
If comparative financial statements are presented, the cumulative effect of a change in accounting principle is presented:
Net of tax, as an adjustment to retained earnings in the statement of stockholders equity.
How is the cumulative effect of a change in accounting principle for periods NOT in the comparative financial statements accounted for?
Accounted for within retained earnings
When there’s a change in reporting entity, how should the change be reported in the financial statements?
Retrospectively, including note disclosures & application to all prior FS presented
Under GAAP, the cash basis for financial reporting should be treated as an __________ and correction of _________ is reported _________
Error; errors; as a prior period adjustment to retained earnings
The correct of an error in the financial statements of a prior period should be reported:
Net of tax, in the current statement of retained earnings as an adjustment of the opening balance.
Exclusion of merchandise is an _______ that requires an adjustment to
Accounting error, beginnings retained earnings (prior period adjustment)
Depreciation expense should reflect the appropriate expense amount
The appropriate expense amount for the current year
