FAR 2 Module 2

Question 1

When there is a “change in entity” how would the financial statements be affected?

Answer 1

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

1. Changing companies in consolidated financial statements
2. Consolidated financial statements versus previous individual financial statements

Question 2

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

Answer 2

A change in estimate. This is due to conservatism. Treating the change as a change in estimate avoids the risk of incorrectly restating prior periods.

Question 3

When a company changes its inventory method from LIFO to FIFO, how should it present the effect of the change in its financial statements for Year 3?

Answer 3

The company must retroactively adj the financial statements for Y2

Effect of the change in Y1 is shown as an adj to the beginning inventory

RE for Y2 in the Y3 comparative financial statements

Question 4

What type of accounting change is a change in reporting entity considered? And how should it be reported?

Answer 4

Change in reporting entity is considered a change in accounting Principle

It should be reported retrospectively, including note disclosures

Question 5

What type of accounting change is a cash basis to accrual basis?

Answer 5

The cash basis for financial reporting is not a GAAP accounting basis, this is an “error”.

Correction of an error from a prior period is a reported as prior period adj to RE

Question 6

Under GAAP if the company is not presenting comparative financial statements, the correction of prior period should be reported in the…?

Answer 6

Retained earnings Statement as an adjustment to the opening balance

Question 7

How should a prior period error related to deprecation be corrected?

Answer 7

1. If only Year 2 financial statements are presented:
   Correct the error by restating the opening balance of retained earnings for Year 2.
2. If Year 1 financial statements are presented:
   Correct Year 1 to reflect the proper depreciation expense.

Question 8

What is the difference with Accumulated depreciation and Depreciation expense?

Answer 8

Accumulated depreciation is a contra asset account that shows the total deprecation recorded on an asset since it was acquired (balance sheet account)

Depreciation expense is the amount of depreciation that is allocated in a given period and recorded on IC

Question 9

Accumulated depreciation vs. Depreciation Expense formula

Answer 9

AccumulatedDepreciation(endofperiod)

AccumulatedDepreciation(beginningofperiod)+DepreciationExpense(fortheperiod)

Depreciation Expense
(Cost of asset - Residual/salvage value)
________________________________________
Useful life of the asset

Question 10

When correcting prior years’ depreciation, how does tax affect the correction for accumulated depreciation vs depreciation expense?

Answer 10

Accumulated Depreciation: Tax does not affect Correction directly since it is a balance sheet account and does not impact current-year taxable income.

Question 11

How are changes in depreciation methods and accounting principles handled?

Answer 11

1. Accounting principles (e.g., LIFO to FIFO): Adjust retained earnings retroactively.
2. Depreciation methods: Treated as a change in estimate, handled prospectively, starting with the asset’s current book value. No retroactive adjustments.