Accounting Test 4

if-converted assumption

a company assumes that both hypothetical and actual conversions of potentially dilutive securities occur: 1) at the beginning of the year if the potentially dilutive security is outstanding at the beginning of the year, 2) at the issue date if the potentially dilutive security is issued during the year

change in accounting estimate effected by a change in accounting principle

change in estimate that is inseparable from the effect of a related change in accounting principle

changes in accounting principle

changes from one generally accepted accounting method to another

direct effects

changes necessary to implement the change in accounting principle

indirect effects

changes to current or future cash flows that result from the change in accounting principle

changes in accounting estimate

changes which involve revisions of estimates used in accounting

changes in the reporting entity

changes which occur when a company reports financial statements that are financial statements for a different reporting entity

self-correcting errors

classified as errors that will self-correct within two years

diluted EPS

computation that incorporates the effects of potentially dilutive securities

income statement errors

errors which only affect revenue, gain, expense, and loss accounts, are commonly caused by misclassification mistakes

consistency

firm's use of the same accounting methods for the same transactions from period to period

retroactive assumption

for share issuances that occur before the split or dividend, the retroactive assumption assumes that the split or dividend occurred at the time of the issuance

prospective method

make an accounting change in the current year and all future years

basic EPS

measure of the earnings per share available to common shareholders that does not consider the potentially dilutive effects of convertible securities and employee options

net income available to common shareholders

net income less preferred dividend requirements

antidilutive effect

occurs if EPS increases or loss per share decreases when assuming the conversion of securities or exercising options and warrants

balance sheet errors

only affect asset, liability, and equity accounts, and are typically the result of a misclassification of accounts in the recording of a transaction

antidilution sequencing

procedure to place potentially dilutive securities in rank order, most dilutive to least dilutive, to determine whether each security has an antidilutive effect on diluted earnings per share

retrospective method

restate all prior-year financial statements presented in the annual report as if the newly adopted principle had always been used

potentially dilutive securities

securities that are not currently common shares, but could become common stock through conversion or exercise

restated financial statements

statements that adjust opening balance sheet accounts for the cumulative effect of applying the new principle in all prior years and present all subsequent financial statement as if the policy had always been used

treasury stock method

the assumption that firms use the proceeds from hypothetical exercise of in-the-money options or warrants to purchase treasury stock at the average market price of the common stock for the period

capital structure

the capital structure indicates its sources of funds from debt and equity issuances used to finance overall operations and capital expenditures