ch 22 acct questions

•Under ___1____, the impracticality exception applies both to changes in accounting principles and to the correction of errors. Under _____2____, this exception applies only to changes in accounting principle.

1 IFRS 2 GAAP

With the Retrospective Accounting Change Approach companies must report

1)Adjusts its financial statements for each prior period presented to the same basis as the new accounting principle. 2)Adjusts the carrying amounts of assets and liabilities as of the beginning of the first year presented, plus the opening balance of retained earnings.

what are the approaches for reporting accounting changes?

1)Currently. 2)Retrospectively- change of multiple past statements as if new principle had always been applied 3)Prospectively (in the future).

Types of Accounting Errors

1.A change from an accounting principle that is not generally accepted to an accounting principle that is acceptable. 2.Mathematical mistakes. 3.Changes in estimates that occur because a company did not prepare the estimates in good faith. 4.An oversight, such as the failure to accrue or defer certain expenses or revenues. 5.Misuse of facts. 6.Incorrect classification of a cost as an expense instead of an asset, and vice versa.

types of accounting changes

1.Change in Accounting Principal. 2.Change in Accounting Estimate. 3.Change in Reporting Entity.

what are the major disclosure requirements for change in accounting principles?

1.Nature of the change in accounting principle. 2.The method of applying the change, and: a. A description of the prior period information that has been retrospectively adjusted, if any. b. The effect of the change on income from continuing operations, net income (or other appropriate captions of changes in net assets or performance indicators), any other affected line item. c. The cumulative effect of the change on retained earnings or other components of equity or net assets in the statement of financial position as of the beginning of the earliest period presented.

Examples of a change in reporting entity are

1.Presenting consolidated statements in place of statements of individual companies. 2.Changing specific subsidiaries that constitute the group of companies for which the entity presents consolidated financial statements. 3.Changing the companies included in combined financial statements. 4.Changing the cost, equity, or consolidation method of accounting for subsidiaries and investments.

examples of estimates in accounting

1.Uncollectible receivables. 2.Inventory obsolescence. 3.Useful lives and salvage values of assets. 4.Periods benefited by deferred costs. 5.Liabilities for warranty costs and income taxes. 6.Recoverable mineral reserves. 7.Change in depreciation methods.

Companies must answer which three questions when doing error analysis?

1.What type of error is involved? 2.What entries are needed to correct for the error? 3.After discovery of the error, how are financial statements to be restated?

In comparative statements what should a company do when accounting for an error?

1.make adjustments to correct the amounts for all affected accounts reported in the statements for all periods reported. 2.restate the data to the correct basis for each year presented. 3.show any catch-up adjustment as a prior period adjustment to retained earnings for the earliest period it reported.

How are accounting errors reported?

All material errors must be corrected using prior period adjustments For comparative statements, a company should restate the prior statements affected, to correct for the error

Long-lived assets accounting error

Asset impairments of property, plant, and equipment; goodwill; or other related items.

what do balance sheet errors affect?

Balance sheet errors affect only the presentation of an asset, liability, or stockholders' equity account

How do companies need to disclose change in accounting estimates?

Companies need not disclose changes in accounting estimate made as part of normal operations, such as bad debt allowances or inventory obsolescence, unless such changes are material. However, for a change in estimate that affects several periods (such as a change in the service lives of depreciable assets), companies should disclose the effect on income from continuing operations and related per-share amounts of the current period

How do companies treat accounting errors and where are they reported?

Companies treat errors as prior-period adjustments and report them in the current year as adjustments to the beginning balance of Retained Earnings.

Journal for changes in accounting principle inventory method LIFO to FIFO (no tax included)

D- Inventory C- Retained Earnings

journal entry to change beginning balance of retained earnings in the current year

D- construction in process C- Deferred Tax Liability or D- Deferred Tax asset C-Retained Earnings

What effect does FASB think companies should retrospectively apply?

Direct Effects

The unexpired portions of the insurance policies totaled $65,000 as of December 31, 2021. Trial balance shows prepaid insurance at a $90,000 debit balance. What is the adj entry if the books have not been closed?

Dr- Insurance expense $25,000 Cr- Prepaid insurance $25,000

The unexpired portions of the insurance policies totaled $65,000 as of December 31, 2021. Trial balance shows prepaid insurance at a $90,000 debit balance. What is the adj entry if the books have been closed?

Dr- Retained Earnings $25,000 Cr- Prepaid insurance $25,000

A physical count of supplies on hand on December 31, 2021, totaled $1,100. Trial balance shows supplies at a debit balance of $2,700. What is the adj entry if the books have been closed?

Dr- Retained earnings $1,600 Cr- Supplies $1,600

A physical count of supplies on hand on December 31, 2021, totaled $1,100. Trial balance shows supplies at a debit balance of $2,700. What is the adj entry if the books have not been closed?

Dr- Supplies Expense $1,600 ($2,700 - $1,100) Cr- Supplies $1,600

Allowances/ contingencies accounting error

Errors involving accounts receivables' bad debts, inventory reserves, income tax allowances, and loss contingencies.

Taxes accounting error

Errors involving correction of tax provision, improper treatment of tax liabilities, and other tax-related items.

How does FASB view changes in estimates?

FASB views changes in estimates as normal recurring corrections and adjustments and prohibits retrospective treatment.

One area in which GAAP and IFRS differ is the reporting of error corrections in previously issued financial statements. While both sets of standards require restatement, ________ is an absolute standard—that is, there is no exception to this rule

GAAP

Equity—other accounting error

Improper accounting for EPS, restricted stock, warrants, and other equity instruments.

Equity—other comprehensive income accounting error

Improper accounting for comprehensive income equity transactions including foreign currency items, minimum pension liability adjustments, unrealized gains and losses on certain investments in debt, equity securities, and derivatives.

Equity—stock options accounting error

Improper accounting for employee stock options.

What do income statement errors affect?

Improper classification of revenues or expenses

Misclassification accounting error

Include restatements due to misclassification of short- or long-term accounts or those that impact cash flows from operations.

Revenue recognition accounting error

Instances in which revenue was improperly recognized, questionable revenues were recognized, or any other number of related errors that led to misreported revenue.

Inventory accounting error

Inventory costing valuations, quantity issues, and cost of sales adjustments.

Error example- company failing to report $20,000 of depreciation expense on a building (only depreciable asset they own) what is the effect of this error on net income?

Net income is overstated by $20,000

Noncounterbalancing Errors

Not offset in the next accounting period. Companies must make correcting entries, even if they have closed the books

Prior period adjustments

Record corrections of errors from prior periods as an adjustment to the beginning balance of retained earnings in the current period.

Expense recognition accounting error

Recording expenses in the incorrect period or for an incorrect amount

How are change in reporting entity reported

Reported by changing the financial statements of all prior periods presented

Why do companies prefer certain accounting methods?

Some reasons are: 1.Political costs. 2.Capital structure. 3.Bonus payments. 4.Smooth earnings.

If one of the impractical conditions exist how should the company apply the new principle instead of retrospective application?

The company should prospectively apply the new accounting principle.

What approach is used in Change to the Equity Method?

The prospective approach because it accounts for the effects of the change in •(1) the period of change if the change affects that period only, or (2) the period of change and future periods if the change affects both

Under GAAP and IFRS, if determining the effect of a change in accounting policy is considered impracticable then what should a company do?

a company should report the effect of the change in the period in which it believes it practicable to do so, which may be the current period

Direct effect of a change in accounting principle

a recognized change in an asset or liability that is required in order to effect the change in principle.

Changes in Accounting Principle employ the retrospective approach by?

a. Changing the financial statements of all prior periods presented. b. Disclosing in the year of the change the effect on net income and earnings per share for all prior periods presented. c. Reporting an adjustment to the beginning retained earnings balance in the retained earnings statement in the earliest year presented.

Changes Due to Error employ the restatement approach by

a. Correcting all prior period statements presented. b. Restating the beginning balance of retained earnings for the first period presented when the error effects occur in a period prior to the first period presented.

If impracticable to determine the prior period effect by the change in accounting principle (e.g., change to LIFO)

a. Do not change prior years' income. b. Use opening inventory in the year the method is adopted as the base-year inventory for all subsequent L I F O computations. c. Disclose the effect of the change on the current year, and the reasons for omitting the computation of the cumulative effect and pro forma amounts for prior years.

Which of the following is false? a. GAAP and IFRS have the same absolute standard regarding the reporting of error corrections in previously issued financial statements. b. The accounting for changes in estimates is similar between GAAP and IFRS. c. Under IFRS, the impracticality exception applies both to changes in accounting principles and to the correction of errors. d. GAAP has detailed guidance on the accounting and reporting of indirect effects; IFRS does not.

a. GAAP and IFRS have the same absolute standard regarding the reporting of error corrections in previously issued financial statements.

Changes in Accounting Estimate employ the current and prospective approach by:

a. Reporting current and future financial statements on the new basis. b. Presenting prior period financial statements as previously reported. c. Making no adjustments to current-period opening balances for the effects in prior periods.

Changes in Reporting Entity employ the retrospective approach by:

a. Restating the financial statements of all prior periods presented. b. Disclosing in the year of change the effect on net income and earnings per share data for all prior periods presented.

Counterbalancing Errors

an error when not detected within the subsequent financial year, is automatically corrected, because the error in the period it was committed is offset by a misstatement in the subsequent reporting period.

Indirect effect of a change in accounting principle

any change to current or future cash flows of a company that results from making a change in accounting principle that is applied retrospectively

I F R S requires companies to use which method for reporting changes in accounting policies? a. Cumulative effect approach. b. Retrospective approach. c. Prospective approach. d. Averaging approach.

b. Retrospective approach.

Which of the following is not classified as an accounting change by IFRS? a. Change in accounting policy. b. Change in accounting estimate. c. Errors in financial statements. d. None of the above.

c. Errors in financial statements.

The adjusted balance sheet and income statement has?

effect of change on key performance indicators balance sheet - inventory and RE income statement- COGS and net income

When should companies not use retrospective application?

if it is impractical and one of the following conditions exists: 1.Company cannot determine the effects of the retrospective application. 2.Retrospective application requires assumptions about management's intent in a prior period. 3.Retrospective application requires significant estimates that the company cannot develop.

How does the investor apply the new method?

in its entirety

Dividends in Excess of Earnings- Accounted for such dividends as a reduction of the investment carrying amount, rather than as revenue. the reason = dividends in excess of earnings are viewed as a ________________ with this excess then accounted for as a reduction of the equity investment.

liquidating dividend

If the company has closed its books and the error has not already been counterbalanced what entry is required?

make entry to adjust the present balance of retained earnings, restatement is necessary for comparative purposes

Adjusted income statement has?

nature and reason for change, description of the prior period information adjusted

are errors considered an accounting change?

no

is adoption of a new principle in recognition of events that have occurred for the first time or that were previously immaterial considered an accounting change?

no

If the company has closed its books and the error has already counterbalanced what entry is required?

no entry, restatement is necessary for comparative purposes even if a correcting journal entry is not required.

How are changes in accounting estimates are reported?

prospectively, Account for changes in estimates in 1.the period of change if the change affects that period only, or 2.the period of change and future periods if the change affects both.

How do you fix a current year income statement error?

reclassify item to its proper position

How do you fix a current year balance sheet error?

reclassify item to its proper position.

when changing from the equity method to the fair-value method, earnings or losses previously recognized under the equity method should

remain as part of the carrying amount of the investment.

How do you fix a prior year balance sheet error?

restate the balance sheet of the prior year for comparative purposes.

How do you fix a prior year income statement error?

restate the income statement of the prior year if comparative statements are presented

What approach does FASB require use of?

retrospective approach- so users can better compare results from one period to the next.

At the next reporting date, the investor should record the unrealized holding gain or loss to recognize the difference between?

the carrying amount and fair value

The cost basis when changing from the equity method to the fair-value method is?

the carrying amount of the investment at the date of the change.

when changing to the equity method companies should also add the cost of acquiring the additional interest in the investee company to?

the cost basis of their previously held interest (the present stock holding).

The adjusted retained earnings has?

the cumulative effect that the change has had on RE

how long will it take a counterbalance error to be offset?

the error will be offset or corrected over two periods.

What is the difference between change in accounting estimate or accounting principle?

•If it is impossible to determine whether a change in principle or a change in estimate has occurred, the rule is Consider the change as a change in estimate. •Referred to as a change in estimate effected by a change in accounting principle •Companies should consider careful estimates that later prove to be incorrect as changes in estimate.