Intermediate financial accounting chapter 20
comparative
Adjust beginning Retained Earnings for the earliest year reported in the _____________ financial statements
Prospective Approach
Application is Impractical: A lack of information makes it impracticable to report a change retrospectively so the new method is simply applied prospectively
Modified retrospective approach
Apply the new standard in the period of adoption Adjust the balance of retained earnings at the beginning of the adoption period to capture the cumulative effects of prior periods (without adjusting the numbers in the prior periods reported)
recording a loss as an expense, recording salaries payable as accounts payable
Error Affecting Previous Financial Statements
Balance Sheet
Error Affecting Previous Financial Statements only affects?
Both Income Statement and Balance Sheet
Error Affecting Prior Year's Net Income affect
retrospectively
Most voluntary changes in principle are reported _________________
Prospective Approach
No modification of prior years is necessary Change is implemented in the period of the change and future periods
Change in reporting entity
Occurs as a 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 (requiring consolidations of certain entities), or -One company acquiring another
Accounted for Prospectively
Prior financials not revised Incorporate the new estimate in the year of change, and future years Disclosure 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
Correction of Accounting Errors
Requires a prior period adjustment (sometimes)- an addition to or reduction in the beginning retained earnings balance in a statement of stockholder's equity (or statement of retained earnings, if that is presented)
Modified Retrospective Approach
Requires application of new standard only to the adoption period (i.e. current period) Requires an adjustment to retained earnings in the current period to account for the cumulative effect of the change in prior periods
Modified retrospective approach
Sometimes this approach is allowed by the FASB when a new standard has been implemented
Income Statement Account, Balance Sheet Account
What accounts would be affected if we are changing our inventory method? -COGS (Inventory Exp.)= _____________ - Inventory= ___________________
Mandated by the Standards
When authoritative literature requires prospective application for specific changes in accounting methods
retrospective approach
When presenting multiple years of financial statements, financial statements issued prior to the change are adjusted to reflect the change Retained earnings is adjusted for the earliest period reported It is made to look like the newly adopted method had been applied all along of that the error never occurred
Change in estimate
When unable to determine which category is appropriate, the change should be treated as
disclosure
__________ is required in the first set of financials after the change in retrospective approach
investors and creditors
____________ and ____________ should be alert to instances when companies change accounting methods and consider not only the comparability of the statements but also possible hidden motivations for the changes
All statements presented are on the same basis
advantages of retrospective approach
Change in estimate
change in depreciation, uncollectible accounts, etc
When previously reported numbers are superseded, public confidence in the integrity of the financial data suffers
disadvantages of retrospective approach
retained earnings will require correction
due to errors affecting net income
restate retrospectively
how do you restate the income statement and balance sheet when the error is affecting prior year's net income?
change in estimate
is change in depreciation method considered change in principle or change in estimate?
Revise Comparative Financial Statements
step 1 of retrospective approach
Adjust Accounting Records for the change
step 2 of retrospective approach
disclosure notes
step 3 of retrospective approach
the new reporting entity existed in those periods
when changing in reporting entity, one reports by recasting all previous periods' financial statements as if?
Economic Conditions, Industry Changes, Mandated by the FASB
why might a company change its accounting principle?