Presentation of financial statements, acc policies, estimates and errors ch3-4

Question 1

Definition of accounting policy

Answer 1

the specific principles bases, rules and practices applied by an entity in reparing and presenting financial statements

Question 2

Do firms always have a choice on accounting treatment?

Answer 2

No, but sometimes. E.g.: They MUST measure inventory at lower of cost and NRV. But they get to CHOOSE if they measure cost at FIFO or weighted average.

Question 3

Under what circumstances is an entity allowed to change accounting policy?

Answer 3

They are allowed ONLY if the following applies: There is a new accounting standard that force the change OR the change will result in more reliable and relevant information.

Question 4

How do you account for a change in policy?

Answer 4

You account for it RETROSPECTIVELY or according to the guidelines of the new standard if you are required to change.

Question 5

Disclosure requirements when changing accounting policy?

Answer 5

There are disclosures that are required always and some that are required depending on if the change was forced or voluntary.

Question 6

What disclosures are required if the change in policy was voluntray?

Answer 6

The reason which suggest that the change will yield more reliant and relevant info

Question 7

What disclosures are required if the change in policy was forced?

Answer 7

The title of the new standard (or IFRIC) and description of any transitional provisions in the standard.

Question 8

What disclosures are required for all policy changes?

Answer 8

The nature of the change. How each item is affected by the change. Amount of any adjustment to EPS.

Question 9

What is an accounting estimate?

Answer 9

Many items in financial accounting can only be estimated and not measured with precision. This does not undermine their relevance or reliability.

Question 10

Give examples of accounting estimates:

Answer 10

The useful life of an asset.
The share of bad debts in receivables
Estimate of taxation charge for the year.

Question 11

Are changes in estimates accounted for retrospectively or prospecively?

Answer 11

PROSPECTIVELY

Question 12

If it is hard to judge if a change is a change in policy or estimate, which one should be chosen?

Answer 12

ESTIMATE

Question 13

What disclosures are required when you change an estimate?

Answer 13

Required to report the nature and amount of the change. Only if it is material however.

Question 14

Definition of prior period error:

Answer 14

failure to use, or misuse of, reliable information that was available or could have been expected to be obtained.

Question 15

Are prior period errors accounted for retrospectively or prospectiely?

Answer 15

RETROSPECTIVELY

Question 16

How many prior periods should be adjusted when a prior period error is realized.

Answer 16

The beginning of the earliest prior period presented.