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?