intermediate chap 22

How should consolidated financial statements be reported this year when statements of individual companies were presented last year?

(1) The financial statements of all prior periods presented should be restated to show the financial information for the new reporting entity for all periods. (2) The financial statements of the year in which the change in reporting entity is made should describe the nature of the change and the reason for it. (3) The effect of the change on income from continuing operations, net income, and earnings per share amounts should be disclosed for all periods presented.

Discuss briefly the three approaches that have been suggested for reporting changes in accounting principles.

(a) Currently—the cumulative effect of the change is reported in the current year's income as a special item. (b) Retrospectively—the cumulative effect of the change is reported as an adjustment to retained earnings. The prior year's statements are changed on a basis consistent with the newly adopted principle. (c) Prospectively—no adjustment is made for the cumulative effect of the change. Previously reported results remain unchanged. The change shall be accounted for in the period of the change and in subsequent periods if the change affects future periods.

Define a change in estimate and provide an illustration. When is a change in accounting estimate effected by a change in accounting principle?

A change in an estimate is simply a change in the way an individual perceives the realizability of an asset or liability.Examples revisions of estimated lives, (3) changes in estimates of warranty costs.A change in accounting estimate effected by a change in accounting principle occurs when a change in accounting estimate is inseparable from the effect of a related change in accounting principle.

Discuss and illustrate how a correction of an error in previously issued financial statements should be handled.

A correction of an error in previously issued financial statements should be handled as a prior-period adjustment. Thus, such an error should be reported in the year that it is discovered as an adjustment to the beginning balance of retained earnings.

Change in the realizability of certain receivables.

Change in accounting estimate; currently and prospectively. Part of operating section of income statement.

Change from FIFO to LIFO method for inventory valuation purposes.

Change in accounting principle; retrospective application is generally not made because it is impracticable to determine the effect of the change on prior years. The FIFO inventory amount is therefore generally the beginning inventory in the current period.

Change from the percentage-of-completion to the completed-contract method for reporting net income.

Change in accounting principle; retrospective application to prior period financial statements.

Charge for failure to record depreciation in a previous period.

Correction of an error and therefore prior period adjustment; adjust the beginning balance of retained earnings.

Distinguish between counterbalancing and noncounter-balancing errors. Give an example of each

Counterbalancing errors are errors that will be offset or corrected over two periods. Non-counterbalancing errors are errors that are not offset in the next accounting period. An example of a counterbalancing error is the failure to record accrued wages or prepaid expenses. Failure to capitalize equipment and record depreciation is an example of a noncounterbalancing error.

Litigation won in current year, related to prior period.

Increase income for litigation settlement, assuming it was not accrued.

Identify and describe the approach the FASB requires for reporting changes in accounting principles.

The FASB believes that the retrospective approach provides financial statement users the most useful information. Under this approach, the prior statements are changed on a basis consistent with the newly adopted standard; any cumulative effect of the change for prior periods is recorded as an adjustment to the beginning balance of retained earnings of the earliest period reported.

What is the indirect effect of a change in accounting principle? Briefly describe the reporting of the indirect effects of a change in accounting principle.

The indirect effect of a change in accounting principle reflects any changes in current or future cash flows resulting from a change in accounting principle that is applied retrospectivelyIndirect effects are not included in the retrospective application, but instead are reported in the period in which the accounting change occurs (current period).

Discuss how a change to the LIFO method of inventory valuation is handled when it is impracticable to determine previous LIFO inventory amounts.

When a company changes to the LIFO method, the base-year inventory for all subsequent LIFO calculations is the beginning inventory in the year the method is adopted.

What are the major reasons why companies change accounting methods?

major reasons why companies change accounting methods: desire to show better profit picture,desire to follow industry practices, desire to increase CF thru reduction in income taxes