Acct. 301B Final-Ch.22

• 1. Change in Accounting Principle- LIFO to FIFO
• 2. Change in Accounting Estimate- Estimate useful life
• 3. Change in Reporting Entity- subsidiaries for which it prepares consolidated financial statements

Errors in Financial Statements- math mistakes, applying wrong accting principle, oversight or misuse of facts.

pg.. 1182

• 1. Report changes currently- report the cumulative effect of the change in the current year's Inc. St. as an irregular item. Do NOT change prior-year financial statements.
• 2. Report changes retrospectively- Retrospective application. "goes back" and adjusts prior years' statements on a basis consistent w/ newly adopted principle. Company shows any cumulative effect of the change as an adjustment to beg. retained earnings of the earliest year presented. (Comparability)
• 3. Report Changes prospectively (in the future)-

pg. 1183

the difference in prior years' income btwn the newly adopted and prior accounting method.

answers.com: Cumulative Effect of a Change in Accounting Principle- Income statement account reflecting the Net of Tax effect of switching from one principle to another. Cumulative effect equals the difference between the actual retained earnings reported at the beginning of the year using the old method and the retained earnings that would have been reported at the beginning of the year if the new method had been used in prior years. Assume in 2005 a company goes from straightline depreciation to sum-of-the-years'-digits depreciation. In 2005, the new method is used to determine depreciation expense. However, the cumulative on prior years of the difference between straight-line (e.g., $50) and sum-of-the-years'-digits (e.g., $65) must be noted. The difference is charged to the cumulative effect account. The entry is to debit cumulative effect $15 and credit accumulated depreciation $15.

Application to recast previously issued financial statements- as if the new principle had always been used.

Retrospective approach because it provides financial statement users with more useful information.

pg. 1182

• Steps
• 1. Adjust financial statements for each prior period presented.
• 2. Adjusts the carrying amounts of assets and liabilities as of the beg. of the first year presented. Make offsetting adjustment to the opening balance of retained earnings or other appropriate component of stockh. equity or net assets as of the beg. of the first yr presented.

is an adjustment to an inventory balance as a result of a change in the inventory valuation method.

pg. 1193

is any change to current or future cash flows of a company that result from making a change in accounting principle that is applied retrospectively.

pg. 1193

No.

pg. 1193

• 1. Cannot determine the effects of the retrospective application.
• 2. Retrospective application requires assumptions about management's intent in a prior period
• 3. Retrospective application requires significant estimates for a prior period, and the company cannot objectively verify the necessary information to develop these estimates.

pg. 1194

Prospectively apply the new accounting principle as of the earliest date it is practicable to do so.

pg. 1194

• 1. Uncollectible Receivables
• 2. Inventory obsolescence
• 3. Useful lives and salvage values of assets
• 4. periods benefited by deferred costs
• 5. liabilities for warranty costs and income taxes
• 6. recoverable mineral reserves
• 7. change in depreciation methods.

pg. 1195

Prospectively. N they acct for the effect in the period of change and future periods when it applies

pg. 1195

As a normal recurring corrections and adjustments, natural result of the accounting process.


pg 1195

consider the change as a change in estimate. AKA "change in estimate effected by a change in accounting principle"

pg. 1196

change in estimate effected by a change in accounting principle


pg. 1196

Companies should consider careful estimates that later prove to be incorrect as changes in estimate.



pg. 1196

Changing the financial statements of all prior periods presented.

• Presenting consolidated statements in place of statements of individual companies
• Changing specific subsidiaries that constitute the group of companies for which the entity presents consolidated financial statements.
• Changing the companies included in combined financial statements
• Changing the cost, equity, or consolidation method of accounting for subsidiaries and investments.

• 1. incorrectly presented prior periods because of the application of an improper accting principle. A change from an accounting principle that is NOT generally accepted to an accounting principle. Ex: company may change from the cash (income tax) basis of accting to the accrual basis.
• 2. Mathematical mistakes. Ex: incorrectly totaling inventory count sheets when computing the inventory value
• 3. Changes in estimates that occur cuz a company did not prepare the estimates in good faith. Ex: a company may have adopted a clearly unrealistic depreciation rate.
• 4. An oversight, such as the failure to accrue or defer certain expenses & revenues at the end of the period.
• 5. A misuse of facts, such as the failure to use salvage value in computing the depreciation base for the straigh-line approach.
• 6. The incorrect classification of a cost as an expense instead of an asset, and vice versa

pg. 1198

Recording corrections of errors from prior periods as an adjustment to the beginning balance of retained earnings in the current period


pg. 1198

restate - the term restatement is used for the process of revising previously issued financial statements to reflect the correction of an error. This distinguishes an error correction from a change in accounting principle.


pg. 1199

Financial statements that follow a consistent format but which cover different periods of time. Useful for spotting trends.

Investorwords.com

only, preferable


pg. 1201

They determine preferability on the basis of whether the new principle constitutes an improvement in financial reporting, not on the basis of the income tax effect alone.


Pg. 1202

As prior-period adjustments and report them in the current year as adjustments to the beginning balance of Retained Earnings.

If a company presents comparative statements.


pg. 1204

• reclassifies the item to its proper position (When the error is discovered)
• OR- if company prepares comparative statements that include the error year, then correctly restate the balance sheet for the error year.

Why? BS errors affect ONLY the presentation of an asset, Liab, or Equity acct.

Ex: Classification of short-term receivable as part of the investment section OR note payable as an account payable OR plat assets as inventory

pg. 1204

revenues or expenses

• Ex: recording % revenue as part of sales, purchases as bad debt expense OR depr expense as % expense
• pg. 1205

• Reclassify entry when it is discovered, if it makes the discovery in the same year in which the error occurs.
• OR- If the company prepares comparative statements that include the error year, it restates the income statement for the error year.

Why? Because prior years I/S r already closed out to the Retained Earnings, so errors in prior yrs do not need to be reclassified at all cuz the accts for the current year are correctly stated.

pg. 1205

Neither. An income statement classification error has No effect on the balance sheet and NO effect on net income.

pg. 1105

• 1. What type of error is it? B/S, I/S or both.
• 2. What entries are needed to correct for the error?
• 3. After the discovery of the error, how are financial statements to be restated?

pg. 1204

Neither. B/S errors have improper classification and only effect the presentation of the B/S. So, to correct it reclassify it or for comparative statements restate the B/S if it involves the error yr.

pg. 1204

You classify either by Counterbalancing Errors OR Noncounterbalancing Errors

pg. 1205

Errors that will be offset or corrected over two periods.

Most errors fall under the counterbalancing errors.

pg. 1205

Errors that take longer than two periods to correct themselves.

pg. 1205