Study Unit 4.3 - Accounting Changes & Error Corrections Flashcards
True or False? Regarding Accounting Changes, If financial information is to have the qualities of comparability and consistency, then entities must not make voluntary changes in accounting principles unless they can be justified as preferable?
True
What is the General Presumption i preparing financial statements?
The General Presumption is that a
- A Principle once adopted must be applied Consistently in preparing the financial statements
What are the 3 type of Accounting Changes?
The 3 types of Accounting Changes are:
1) A Change in Accounting Principle
2) A Change in Accounting Estimate, and
3 A Change in Reporting Entity
Name three things that must happen in order for a Change in in Accounting Principle to occur?
A Change in Accounting Principle occurs when an entity:
1) Adopts a Generally Accepted Accounting Principle (GAAP) different from the one previously used.
2) Changes the METHOD of applying a Generally Accepted Accounting Principle (GAAP) or
3) Changes to a Generally Accepted principle when the principle previously used is no longer Generally Accepted
(Replaces GAAP principle from outdated, unused one)
True of False? A change in principle does not include the initial adoption of a principle because of an event or transaction occurring for the first time or that previously had an immaterial effect.
True
True or False? A change in Accounting principle also does not include adoption of a principle to account for an event or transaction that clearly differs in substance from a previously occurring event or transaction.
True
What is Retrospective Application Required for?
Retrospective Application is required for all:
- direct effects and
- the related income tax effects
of a change in principle.
What is an example of a direct effect?
An example of direct effect is an adjustment of an inventory balance to implement a change in the method of measurement.
True of False? Retrospective Application must include INDIRECT EFFECTS.
False:
Retrospective application must NOT include indirect effects.
What are INDIRECT EFFECTS?
Indirect Effects are changes in current or future cash flows from a change in principle applied retrospectively.
What is an example of an INDIRECT EFFECT?
An example of INDIRECT EFFECT is:
- A Required Profit-Sharing Payment based on a reported amount that was directly affected (e.g. Revenue).
When are INDIRECT EFFECTS recognized and reported?
Indirect Effects are recognized and reported:
- In the Period of Change
What is the Cumulative Effect on the new principle of all periods not reported?
Adjustments are made at the beginning of the first period reported for the carrying amounts of:
1) Assets
2) Liabilities
3) Retained Earnings (or other components of equity or net assets)
What are INDIRECT EFFECTS?
Indirect Effects are changes in current or future cash flows from a change in principle applied retrospectively.
What is an example of an INDIRECT EFFECT?
An example of INDIRECT EFFECT is:
- A Required Profit-Sharing Payment based on a reported amount that was directly affected (e.g. Revenue).
