ACC Ch. #22
Corrections of errors from prior periods are reported:
As adjustments to the current year's beginning retained earnings
3 types of accounting changes
Change from LIFO to FIFO. Change in reporting entity. Change in the estimated useful life of an asset.
Examples of a change in reporting entity
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. Presenting consolidated statements in place of statements for individual companies.
IFRS and GAAP both require the companies apply the direct effects of changes in accounting policies retrospectively.
True
IFRS does not explicitly address the accounting and disclosure of indirect effects.
True
Understating ending inventory will understate the current year's net income
True
Errors in prior period statements are accounted for as
adjustments to the beginning balance of retained earnings.
Presenting consolidated financial statements this year when statements of individual companies were presented last year is
an accounting change that should be reported by restating the financial statements of all prior periods presented
Under IFRS, the impracticality exception applies to
both correction of an error and change in accounting principle; GAAP only allows it for a change in accounting principle
A change that occurs as the result of new information or as additional experience is acquired is a:
change in accounting estimate
Whenever it is impossible to determine whether a change in principle or a change in estimate has occurred, the change should be considered a:
change in estimate
Accounting changes are often made and the monetary impact is reflected in the financial statements of a company even though, in theory, this may be a violation of the accounting concept of
consistency
A switch from the cash basis of accounting to the accrual basis is considered a:
correction of an error
inventory errors are
counterbalancing errors
Which of the following is not a counterbalancing error?
failure to record depreciation
failure to adjust bad debt is a
non-counterbalencing error
errors that take more than two periods to correct themselves are
non-counterbalencing errors
The cumulative effect of a change in accounting principle is reported:
on the retained earnings statement as an adjustment to the beginning balance of the earliest year presented
Why would companies prefer certain accounting methods>
political costs, bonus payments, smooth earnings
correction of errors are treated as
prior period adjustments
indirect effects don't change but direct effects do change
prior period amounts
If retrospective application of a change in accounting principle requires assumptions about management's intent in a prior period, then what approach should be used to account for the change?
prospective approach
Changes in estimates must be accounted for:
prospectively
What approach does the FASB require when accounting for changes in accounting principle?
retrospective
A change from LIFO inventory valuation to another inventory valuation method is an example of a:
retrospective type change
When a company changes from the equity method of accounting to the fair value method, the cost basis for accounting purposes is
the carrying value of the investment at the date of change
A change to LIFO inventory valuation from any other acceptable inventory valuation method
would require no restatement--too difficult therefore impractical
