M2

Question 1

When is the prospective approach used

Answer 1

When changes in accounting estimates are made

Question 2

What is the prospective approach?

Answer 2

Using new information in the current and future years

Question 3

What are 3 examples of accounting estimate changes requiring a prospective approach?

Answer 3

Changes in lives of fixed assets
Adjustment of officer salary’s and bonuses
Writing down inventory
settlement of litigation
-Changes in accounting principal that are inseparable from changes in estimates (Going to LFIO, changing depreciation method)

Question 4

When is the retrospective approach used?

Answer 4

When changes in accounting principle or accounting entity are made

*Changes from one Acceptable GAAP method to another GAAP method

Question 5

What is the retrospective approach?

Answer 5

All previous financial statements along with the current year should be restated to reflect new information

Question 6

What is the rule of preferability

Answer 6

Entity’s cannot change accounting principle without justification such as requirement by GAAP or an alternative principle states information more fairly.

Question 7

When is the prospective method used on an accounting principle change?

Answer 7

When going to LIFO or changing a depreciation method

Question 8

What are some examples of a change in accounting entity

Answer 8

mergers, acquisitions, divestitures

Question 9

How is a change in accounting principle treated when there are comparative statements

Answer 9

Adjust to the new method in all years presented & calculate the cumulative effect net of tax as an adjustment to beginning retained earnings

Question 10

How is a change in accounting principle treated when there are noncomparative statements

Answer 10

Use the new method in the current year and adjust beginning retained earnings net of tax

Question 11

How do you adjust for errors if comparative financial statements are presented for the year containing the error?

Answer 11

Correct the error in those prior financial statements

Question 12

How do you adjust for errors if comparative financial statements are presented but not for the year containing the error?

Answer 12

Adjust beginning retained earnings of the earliest year presented (net of tax)

Question 13

How do you adjust for errors if comparative financial statements are not presented?

Answer 13

The error correction is reflected as an adjustment to the opening balance of retained earnings (net of tax)

Question 14

How is an error treated

Answer 14

prior period adjustment not retrospective