M2 - Accounting Changes & Error Corrections

Question 1

How to report a change in estimate?

Answer 1

Affect only the current and subsequent periods (not prior periods and not retained earnings)

Question 2

How is the effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate be reported?

Answer 2

As a component of income from continuing operations, the overall effect is as a change in estimate, therefore it is only reported prospectively as a component of income from continuing operations

Question 3

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

Answer 3

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

Question 4

How would a company report the cumulative effect of changing from cash basis of accounting to accrual basis during the current year in its financial statements?

Answer 4

This would be treated as an error, as it is not in following GAAP. Correction of an error from a prior period is reported as prior period adjustment to retained earnings.

Question 5

How is a prior year error adjusted in retained earnings?

Answer 5

Subtract the adjustment from the beginning retained earnings balance for the current year net of income tax