Accounting ch 21 & 22

cash paid to suppliers

= COGS- Decrease in inventory + decrease in Acct Payable

Direct Effects

Changes in accounting principle can have both direct and indirect effects. Direct effects are changes necessary to implement the change in accounting principle. Firms always apply direct effects retrospectively, unless it is impractical to do so. Indirect effects are changes to current or future cash flows that result from the change in accounting principle. RETROSPECTIVE

voluntary or mandatory

Changes in accounting principle may be____________________. Newly issued accounting standards are mandatory accounting changes. Voluntary changes occur when a firm decides to change accounting methods (e.g., LIFO to FIFO). A firm should only voluntarily change accounting principles if the new principle more accurately portrays its financial position and performance. The adoption of a new principle in recognition of events that have occurred for the first time is not considered a change in accounting principle.

Change in Entity

Consolidated FS, espec. BS Retrospectively

Currently,Prospectively

FASB considered 2 other approaches for treating a Change in Principle: __________: Report cumulative effect on current IS (shown net of tax) as an irregular item (pre-2005 GAAP) with Discontinued Ops. ___________: Do not recast amounts in past comparative FS columns. Apply change only to current & future years

Change of Principle Note Disclosures

For any change in accounting principle, firms must provide the following footnote disclosures in the year of the change: Description of the nature of the change: An example of this disclosure is ". . . effective January 1, 2018, the company changed its method of accounting for inventory from the FIFO method to the average-cost method." Management's justification for the change, which indicates why the new method is preferable: An example of this disclosure is ". . . management believes that the new method of accounting for inventory valuation will better reflect the company's operations." The method of applying the change: The company specifies the retrospective or prospective method. A description of any adjusted prior-period information. The effect of the change on income from continuing operations, net income, per share amounts, and any other affected line item. The cumulative effect of the change on retained earnings for the first balance sheet presented.

Reconciliation

Format of the 3 Sections of the SCFs? 3 Activity Totals = Change in Cash: Beg. vs. End

retrospective approach.

Generally, firms are required to report all changes in accounting principle under the retrospective approach. There are two exceptions: In the case of a mandatory change required by a new accounting standard, an entity should follow the specific transition requirements provided within the new standard. The new standard could specify retrospective or prospective application. If no such requirements exist, then the firm should follow the ___________________________________

direct method indirect method

The _____________ is GAAP preferred over the _____________________: Shows only operating cash receipts & payments, which is the main purpose of the SCF Allows FS Readers to more easily assess Co. ability to generate future cash flows, pay liabilities & dividends It is consistent with the Investing & Financing Sections, which also show only cash receipts & disbursements

Change in Estimate

______: IS but not highlighted as a separate IS line item Prospectively

operating direct

all + or - Cash

direct

all investing and financing actvities are all + or - cash (________)

Indirect Method

(also referred to as the Reconciliation Format), firms reconcile net income to net cash provided by operating activities by making 2 types of adjustments: Adjustments for noncash revenues, expenses, and other gains and losses. Adjustments for changes in current assets and liabilities.

Reporting Entity

: Co. reports financial statements that are, in effect, financial statements for a different reporting entity, such as Change in Subsidiaries reported in Parent Co. Consolidated FS

Why a Co. Changes Acct Principle

A Co. must state reasons, to SEC & in Notes, as to why the new Method is better for FS Readers, although the real reasons may be: Improve NI Improve Bonus Payments Smooth Earnings.

Reporting Entity Change

A change from reporting as one type of entity to another type of entity Retrospective - Change comparative columns in current FS as if all current subsidiaries were also controlled in the past

accrual

A main difference between the income statement and the statement of cash flows is that the income statement is based on the ________ method of accounting and the statement of cash flows is based on the cash basis of accounting

changes in estmate

Accounting Estimate: Change in prediction of future conditions & events required by FASB's conceptual framework (often based on the Matching Principle of expense recognition).  Report effect of changed estimate prospectively only in current & future periods. Do not recast amounts in past comparative FS columns/ FASB views changes in estimates as normal recurring adjustments and prohibits retrospective treatment.

prospectively

Acct Principle changes : If it is impractical to use the retrospective approach for any one of the following three conditions, then the entity should use the prospective approach. The use of retrospective method is impractical if: The financial statement effects of the retrospective application are not determinable. Retrospective application requires assumptions about management's intent in a prior period. Retrospective application requires significant estimates for a prior period, and the availability of the necessary information to determine these estimates cannot be objectively verified. If any above exist, Co. should apply new method ________________________

Correction of Error

Adjust Beg. RE on SE Statement Retrospectively

correction or errors

All material errors must be corrected. Record corrections of errors from prior periods as an adjustment to the beginning balance of retained earnings in the current period. Such corrections are called prior period adjustments. For comparative statements, a company should restate the prior statements affected, to correct for the error. If an error is immaterial, the Co. does not need to apply the processes we have just discussed. materiality is a matter of judgement

true

All, except Change in Estimate, require significant Note Disclosure.

Investing

CFs from acquisition & disposal of noncurrent assets & short-term investments (except cash equivalents/Trading). Cash from buying & selling L-T Assets & Investments (except Trading - Operating), including lending Cash & receiving loan principal

Financing

CFs from principal on short- and long-term debt and equity financing, including dividend payments to owners Cash from selling CS, PS, TS, buying TS, paying Divs, or borrowing & paying loan principal (& issuing bonds)

Operating

CFs from production & delivery of goods & services. 2 presentation approaches: Direct or Indirect. Primarily IS on Cash basis; any Cash not in Investing or Financing,including Interest paid or received, & Divs received (but not paid)

Accounting Principle

Change from 1 GAAP Method to another GAAP Method (except Depreciation Methods) ->Does not include: Adopting new GAAP Method for the 1st time Switching from non-GAAP to GAAP method (Correction of Error, unless original method dealt with immaterial amounts - no Error) Depreciation, Amortization or Depletion Methods

Accounting Principle

Change in __________: Adjust Beg. RE on SE Statement for cumulative effect of gain or loss of past NI's comparing effects of old method vs. new method Retrospectively

new method values

Change in acct principle FS affects Fox Co. uses _______________________ for BS & IS accounts in year of the AP Change, & SE Stmt beginning RE is adjusted for the cumulative effect of the G/L on prior years' NI On all past comparative columns for FS in year of the Change in AP, amounts for Inventory, CGS, DTL or DTA, & RE (& all other affected line items, such as GP, NI, etc.) are based on the new method, as if Fox had been using it for all past years.

Accounting Estimate

Change original best estimate to a better estimate based on better recent info

true

Changes in Estimate are not generally required to be disclosed if change is made as part of normal operations, such as bad debt allowances, unless changes are material However, changes affecting the NI of multipleperiods, such as change in UL for depreciation, should be disclosed, along with related EPS amounts.

4th type of adjustment

Correction of material Errors in past FS's include: Math errors (unintentional or "cooking the books") Mistakes applying principles, methods, facts Correcting original fraudulent estimates Switching from material non-GAAP to GAAP Method  Apply retrospectively: Correct comparative columns & Beg. RE in Statement of SE to correct past NIs. & related BS, real, accts. Also known as Prior Period Adjustment

CBE corrections

If Books for the year after the error are not yet closed:  Adjust beginning RE for past nominal account (NI) errors & related BS accounts for past real account errors If Books for the year after the error are closed:  No entry is necessary - Error is counterbalanced & all BS accounts are corrected Restatement is needed to correct prior comparative amounts in current FS, whether or not a Correcting Entry is required

Indirect Effect

Indirect effects are changes to current or future cash flows that result from the change in accounting principle. Firms only apply indirect effects prospectively; retrospective treatment is not permitted for indirect effects of a change in accounting principle PROSPECTIVE

error examples

Oversights: Fail to accrue or defer revenue or expenses at year-end; Forgot Adjusting Entry Misused Method: Fail to subtract salvage value for depreciation Incorrect Cost Classification: Expense vs. capitalize or visa versa Miscounts: Inventory physical count

Examples of a change in reporting entity

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.

Disclosure

Significant noncash investing & financing transactions, and for the Indirect approach only, interest paid and taxes paid Format of the 3 Sections of the SCFs?

Noncash Investing & Financing Disclosure

Stock dividends. • Conversion of bonds into capital stock. • Capital lease signing. • Plant asset exchanges and other nonmonetary exchanges Many significant investing and financing transactions do not have immediate cash flow consequences. For example, acquiring land financed by the issuance of long-term debt does not involve cash, so not included in the SCFs, however they must be disclosed the notes or a separate schedule (if material). Other significant examples include: Such disclosure can be reported at the end of its SCFs or in Notes to the Financial Statements.

Estimate Examples

Uncollectible Receivables from credit Sales Useful Life & Salvage Value for Depreciation, Amortization & Depletion Expense Future periods benefited by deferred costs such as Deferred Tax Asset Change in depreciation, amortization or depletion methods, now treated like a change in estimate

Statement of Cash Flow, Income Tax paid

What FS is not Affected by change in acct principle? _______________is unchanged, except for the Operation Section using Indirect Method, where NI and the accrual to cash adjustment changes. Also, ____________________does not change, because Change in AP for Book is not a change for Tax - IRS approval needed. Changes in any Accounting Method for Book never directly affect Cash, unless also changed for Tax Note: IRS LIFO Conformity Rule: Cannot use LIFO for Tax (reducing tax) unless it is also used for FS's

Dividends paid

Which of the following items would not be included in the operating activities section of an​ entity's statement of cash flows under U.S.​ GAAP? Income taxes paid. B. Interest received. C. Proceeds from the sale of trading activities. D. Dividends paid.

Change in Accounting Methods (principle change types)

_________________ (except for Depreciation): Inventory: LIFO to FIFO Bad Debt: % of Sales to % of Receivables Treasury Stock: Par Value to Cost Method Revenue: % of Completion to Completed Contract Amounts recast in past comparative FS columns as if New Method was always used - for comparability consistency

Non-Counter Balancing

an error that takes more than 2 periods to reverse & correct all accounts (Depreciation error corrects at UL-end)

Corrections of Errors

are not considered to be an  accounting change, but is the 4th item in this Chapter.

Cash Equivalents

are short-term, highly liquid investments that are both: Readily convertible to known amounts of cash, and So near maturity there's little risk of material value changes Include only if original maturity is 3 months or less If 1st BS item is Cash & Cash Equivalents, SCFs must include examples: -treasury bills -commercial paper -money market funds

Operating

cash payment for taxes, cash payments for interest, cash receipts from interest and dividends

financing (US GAAP)

cash payments for dividends to owners

Counter Balancing Error

is an error that reverses, correcting itself by the end of 2 periods, when all real (BS) & nominal accounts are correct(Errors in physical count or failing to accrue wages)

Direct Method

method (also referred to as Income Statement Format) prepares the Operating Section by adjusting each line item of the Income Statement to convert from accrual basis to cash basis. Direct Method Operating is similar to an IS on the cash-basis. At a minimum, Direct method requires the following line items: Cash collected from customers, lessees, licensees, etc. Cash collected for interest and dividends Cash paid for inventory. Cash paid for employees, interest and taxes. Cash paid for other operating costs, including insurance, prepaid expenses, and other accrued expenses.

operating indirect

starts with accrual IS NI & makes Adjustments to get to same Net Operating Cash as Direct