311 final **** my life -- chapter 20

Examples of changes in accounting principles

- Adpot a new accounting standard - Change methods of inventory costing -change from cost method to equity method

Change in reporting Entity

- Change from reporting as one type of entity to another type of entity Occurs as result of: - presenting consolidated financial statements in place of statements of individual companies -Changing Specific companies that constitute the group for which consolidated or combined statements are prepared - changes in accounting rules - reported by recasting all previous periods financial statements as if the new reporting entity existed in those periods - A disclosure note should describe the nature of the change and the reason it occurred

Retrospective approach

- Financial statement issued in previous years are revised - statement are made to appear as if the newly adopted accounting method had been applied along or that the error had never occurred - JE is created to adjust all account balances affected

Examples of error corrections

- Mathematical Mistakes - Inaccurate physical count of inventory - Change from Cash Basis of Accounting to the Accrual basis - failure to record an adjusting entry - recording an asset as an expense - fraud or gros negligence

Error Affecting A prior year's Net Income

- Most errors affect net income... when they do they affect the balance sheet as well - both statements must be retrospectively restated - The statement of cash flows sometimes is affected too - incorrect account balances must be corrected - income taxes often are affected by income errors ( Amended tax returns are prepared, either to pay additional taxes, to claim a tax refund for taxes overpaid)

MDS transportation incorrectly recorded a $ 2 million note receivable as accounts receivable. The error was discovered a year later

- SInce last year net income was not affected by the error the balance in retained earnings was not incorrect. SO no prior period adjustment - A disclosure motes would describe the nature of the error, but there would be no impact on net income, income from continuing operations, and earnings per share to report.

Lamont Communications has amortized a patent on a straight-line basis since it was acquired in 2013 at a cost of $50 million. During 2016 management decided that the benefits from the patent would be received over a total period of 8 years rather than the 20-year legal life being used to amortize the cost. Lamont's 2016 financial statements should include:

A patent balance of 34 million

The Prospective Approach Usually is required for: a. A change in reporting entity b. A change in estimate c. A change in accounting principle d. A correction of an error

B. A Change in estimate - With a change in estimate, the current amounts are used to apply the new estimate this year and future years. The new estimate is not applied to previous periods

The Prospective Approach

Considered to be a change in accounting estimate that is achieved by a change in accounting principle

Global products overstated its inventory by 30 million at the end of 2016. The discovery of this error durring 2017, before adjusting or closing entries would require"

DR. Retained Earnings 30 CR. Inventory 30

Little paid 3 million for replacement computers and recorded the expenditure as maintenance expense. The error was discovered a week later

Dr. Cash Cr. Maintenance expense to correct the account Dr. Equipment 3 Cr. Cash 3

Change is accounting estimate

Revision of an estimate because of new information or new experience - Accounted for Prospectively - Discloure note should describe the effect of a change in estimate on income from continuing operations, net income, and related per share amounts for the current period

A change in accounting principle that usually should not be reported by revising the financial statements of prior periods is a change from the: a. The weighted-average method to the FIFO method. b. The weighted-average method to the LIFO method. c. FIFO method to the weighted-average method. d. LIFO method to the weighted-average method

The weighted-average method to the LIFO method

Big Merchandisers changed from the FIFO method of costing inventories to the weighted average method during 2016. When reported in the 2016 comparative financial statements, the 2015 inventory amount will be

c. Increased or decreased, depending on how prices changed during 2016. It will be restated to the balance it would have if the average method had been used all along.

Most changes in accounting principles are reported

retrospectivley

error correction

- correction of an error caused by a transaction being recorded incorrectly or not at all - Previous years: financial statements are retrospectively restated

Prospective approach

- effects of a change are reflected in the financial statements of only the current and future years

Its significantly more complicated to deal with an error if

- it affected net income in the reporting period in which it occurred - it is not discovered until a later period

Two approaches to report accounting changes and error corrections:

- retrospective approach - prospective approch

Most voluntary changes in accounting principles are reported

- retrospectivley

Examples of changes in accounting estimates

-Changes in depreciation methods - Change estimate of useful life of depreciable asset - Change estimate of periods benefited by intangible assets - Change actuarial estimates pertaining to a pension plan

examples of changes in reporting entity

-consolidate a subsidiary not previously included in consolidated financial statements - report consolidated financial statements in place of individual statements

Steps to correct an error

1. JE is made to correct any account balances that are incorrect as result of the error 2. Financial statements that were incorrect as a result of the error are retrospectively restated to reflect the correction 3. RE is one of the accounts incorrect as a result of the error, the correction is reported as prior period adjustment to beginning balance in a statement of shareholders equity 4. A disclosure note should describe the nature of the error and the impact of its correction on net income

Which of the following is not a change in accounting principle usually accounted for by restrospectively revising prior financial statements a. Change from SYD to DDB. b. Change from FIFO to the average method. c. Change from the average method to FIFO. d. Change from LIFO to FIFO.

Change from SYD to DDB. Changes in depreciation methods are treated as changes in estimates and accounted for prospectively.

Change in accounting principle

change from one generally accepted accounting principle to another

Changes to LIFO are

handled prospectively.