F2M2 Flashcards

Accounting Changes and Error Corrections

1
Q

Reporting a change in estimate is accounted for:

A

prospectively

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2
Q

Changes in estimates that affect future periods?

A

if it affects several future periods than the effects on the income from continuing operations, net income, and related per share information from the current year should be disclosed in the notes.

ordinary estimate changes in the period need to also be disclosed if they are material. ordinary being change in uncollectible accounts, etc.

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3
Q

Change in Accounting Principle: Rule of preferability

A

an accounting principal may be changed only if it is allowed by GAAP and the new principle is preferable and more fairly presents the information.

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4
Q

Reporting changes in an accounting principle:
General Rule and the two exceptions

A

general rule: adjusting beginning RE in the earliest period presented for the cumulative effect of the change, and if prior periods are presented (comparative) they should be restated retrospectively.

1st exception: Impracticable to estimate. handled prospectively

2nd exception: change in depreciation method, which is considered both a change in estimate and principle so its treated prospectively.

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5
Q

Effects of changes in Accounting Principle (retrospective application)

A

if comparative FS are presented: Cumulative effect is the difference between beginning RE in the first period presented and the potential value of RE in that period if the new principle had been applied to all previous periods. It is presented new of tax as and adjustment to beginning RE.

noncomparative Presented: Since there are no prior periods being shown you would show the difference of beginning RE in the year of change and what the value of RE would have been if the new accounting principle was retroactively applied to all previous periods.

difference between comparative and noncomparative: same treatment, but just what is shown on the statements.

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6
Q

Financial statements of all prior periods presented should be restated when there is a “change in entity” such as resulting from:

A

Changing companies in consolidated financial statements.

Consolidated financial statements versus previous individual financial statements.

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7
Q

A company presents comparative FS. at the beginning of year 3 they change from LIFO to FIFO. how does the company present the year 1 effect of the change in year 3?

A

An adjustment to beginning year 2 inventory balance with an offsetting adjustment to beginning year 2 retained earnings.

presented net of tax.

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8
Q

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

A

if comparative: Retrospectively, including note disclosures, and application to all prior period financial statements presented.

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9
Q

change from cash basis to accrual basis considered:

A

a correction of an error becuase cash basis is not GAAP accepted.

handled a a period period adjustment

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10
Q

If a purchased machine had been inaccurately expensed in year 1 and the depreciated for 3 years. how would you calculate the prior period adjustment?

A

if the machine was correctly depreciated so take the depreciation expense * the 3 years it was depreciated

then adjust for them incorrectly expending the purchased machine and not capitalizing it so the cost of the machine

the difference between those * (1- tax rate) = the adjustment.

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11
Q

if no depreciation was booked the prior year but should have been. what amount should the depreciation expense be for the current year?

A

the prior error has no effect on what actual depreciation expense is because the yearly depreciation expense would already be calculated.

however, the error is corrected by adjusting beginning RE. not double counting this years depreciation expense.

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12
Q

a prior period error was found that a bonus that was earned was not paid, but not recorded. whats the effect of the error

A

should result in a $10,000 expense for the year and a $10,000 accrued liability at the end of the year because it was unpaid.

which means net income (and subsequently RE) should have been 10,000 lower.

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13
Q

a prior period error was found that a refund for utlities was recieved and recorded as income. what is the effect of the error?

A

should have resulted in a receiveable at the end of year 1 and a decrease to utilities expense for year 1. Decreasing an expense makes net income higher and therefor would be an increase to RE.

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