FAR Module 9C Flashcards
T/F
Corrections of errors are accounting changes
False
Corrections of errors are not accounting changes. Corrections of errors are done as prior period adjustments to the beginning balance of retained earnings, net of tax
List the three kinds of accounting changes
changes in accounting principle
changes in accounting estimate
changes in reporting entity
What term word is reserved only for describing corrections of errors to the financial statements
Restatements or restated
Publicly traded companies are required to report how many years of comparative statements for the income statement and statement of cash flows
3
Publicly traded companies are required to report how many years of comparative statements for the balance sheet
2
What is a change from the use of one generally accepted accounting principle to another generally accepted accounting principles
This is a change in accounting principle
What is the change of estimated financial statement amounts based on new information or experience
This is a change in estimate
What is a change that results in the financial statements representing a different entity
This is a change in reporting entity
What do you call the financial statement treatment where you report the cumulative effect of change in the carrying amounts of assets and liabilities as of the beginning of the first period presented, with an offsetting adjustment to the opening balance of retained earnings for that period. Financial statements for each period are adjusted to reflect period specific effects of the change for direct effects.
Another method is to report financial statements of all periods to show financial information for the new reporting entity for those periods.
This is retrospective application.
For what type of accounting change do you use retrospective application
This is the treatment for a change in accounting principle or a change in reporting entity
What is the financial statement treatment called where you report in the period of the change and future periods; you do not adjust financial statements of previous periods.
This is a prospective financial statement treatment
For what type of accounting change do you use the prospective financial statement treatment
This is the treatment for a change in estimate
This is the process of revising previously issued financial statements to correct an error
Restatement
This is the application of a different accounting principle to previously issued financial statement as if that principle had always been used. This is required for changes in accounting principle and changes in reporting entity
Retrospective application
These are the effects to the assets, liabilities, deferred income tax assets, deferred income tax liabilities, and impairment losses as a result of a new accounting principle
Direct effects
These are any changes to current or future cash flows that result from making a change in accounting principle. Examples are royalties and profit-sharing.
Indirect effects
Changes in depreciation, amortization, and depletion methods are treated as
changes in accounting estimates instead of changes in accounting principles
Changes in percentages for bad debt expense or warranty expense are examples of what
Changes in accounting estimates
Changes in salvage value or estimated useful life for depreciable assets are examples of what
Changes in accounting estimates
Formula for straight line depreciation
(Historical cost - salvage value)/useful life
Formula for Double Declining Balance Depreciation
(1/useful life)*2 = DDB%
(HC - Accumulated Depreciation) * DDB% = period 1 depreciation
Must recalculate each year
A change in the inventory flow method (FIFO, LIFO, weighted average/moving average) is an example of what
A change in accounting principle
A change in construction accounting method (such as percentage of completion versus a completed contract method) is an example of what
A change in accounting principle
This is the difference between the old and new accounting principle since the company first started business until the beginning of the first period represented
The cumulative effect
T/F
Indirect effects are part of the cumulative effect
False, only direct effects are part of the cumulative effect.
Indirect effects are reported in the period the change is made
T/F
Retrospective treatment means that you apply the new accounting principle to the prior periods financial statements as if the new accounting principle had been used in those periods
True
What are the three criteria of impracticability that you must meet to be able to apply a new accounting principle prospectively
1) after making every reasonable effort to apply the new principle retrospectively you are unable to do so
2) there are assumptions about managements intentions that cannot be independently substantiated
3) significant estimates are required and you cannot obtain objective information to make these estimates
T/F
Converting from FIFO to LIFO is a classic case of impracticability where you are allowed to apply the new accounting principle prospectively rather than retrospectively
True
Formula for calculating Purchases
P = Ending Inventory + CoGs - Beginning Inventory
T/F
Purchases does not change when switching between two methods of measuring inventory
True
The effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate should be reported how?
The effect of a change in accounting principle which is inseparable from the effect of a change in accounting estimate should be accounted for as a change in accounting estimate
If the cumulative effect of applying an accounting change can be determined but the period-specific effects on all periods cannot be determined the cumulative effect of the change should be applied how
To the carrying value of the assets and liabilities at the beginning of the earliest period to which it can be applied
