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Flashcards in Accounting Changes Deck (23)
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1
Q

What are the four types of accounting changes and error correction?

A

Accounting Principle Changes
Accounting Estimate Changes
Changes in REporting Entity
Corrections of Errors

2
Q

What does retrospective mean?

A

application of a principle to prior periods as if that principle had always been used. The procedure records the effect of the change on prior years as an adjustment to the beginning balance in retained earnings for the year of change rather than in income

3
Q

What does prospective mean?

A

apply the change to current and future periods only; prior year statements are unaffected.

4
Q

What is a restatement?

A

the term reserved specifically for error changes. Restatement requires correcting the comparative financial information presented along with correcting the opening retained earnings balance

5
Q

What accounting approach is used for an accounting principle change?

A

Retrospective

6
Q

What accounting approach is used for an accounting principle change when you cannot determine prior year effects?

A

Prospective

7
Q

What accounting approach is used for an accounting estimate change?

A

Prospective

8
Q

What accounting approach is used for a change in reporting entity?

A

Retrospective

9
Q

What accounting approach is used for a correction of accounting error?

A

restatement

10
Q

What is a change in accounting principle

A

A change from one generally accepted accounting principle to another when there are at least two acceptable principles, or when the current principle used is no longer generally accepted. A change in the method of applying a principle is also considered a change in accounting principle

11
Q

What steps are taking when using a retrospective application?

A
  1. The cumulative effect of the change on periods before those presented is reflected in the carrying amounts of affected assets and liabilities as of the beginning of the earliest period presented, along with an offsetting adjustment to the opening balance of retained earnings for that period.
  2. The financial statements for prior periods presented comparatively are recast to reflect the period-specific effects of applying the new principle. Each account affected by the change is adjusted as if the new method had been used in those periods.
  3. Through a journal entry, the beginning balance of retained earnings in the year of the change is adjusted to reflect the use of the new principle through that date. The amount of this cumulative effect is generally not the same amount as that for step 1 above because different periods are covered in each.
12
Q

Does a retrospective approach affect retained earnings or the income statement?

A

It is closed to retained earnings and will not show in the income statement

13
Q

When is the retrospective approach not applied?

A

After making a reasonable effort to apply the principle to prior periods, the entity is unable to do so;
Assumptions about management’s intent in prior periods are required and such assumptions cannot be independently substantiated;
Retrospective application requires estimates of amounts based on information that was unavailable in the prior periods or on circumstances that did not exist in the prior periods.

14
Q

What is a change in reporting entity?

A

A change in reporting entity results in financial statements of a different reporting entity. A change in reporting entity is limited mainly to:

  1. Presenting consolidated or combined financial statements in place of financial statements of individual entities;
  2. Changing the set of subsidiaries that make up a consolidated group;
  3. Changing the entities included in combined financial statements;
  4. Change from cost or fair value method for accounting for an investment to the equity method for investment.
15
Q

How do you treat a change from cost to FV accounting for an investment to equity method?

A

Retrospective

16
Q

How do you treat a change from equity method to cost or FV method?

A

Prospective

17
Q

What are some examples of a change in estimate?

A

Bad debts, warranties, depreciation, pension accounting, lower of cost or market, asset impairment, and many others are examples.

18
Q

What does a prospective application mean?

A

Changes in accounting estimate are accounted for in the current and future periods (if affected). Prior period statements are not affected in anyway nor are there disclosures with respect to prior statements.

There is no cumulative effect account

19
Q

How do you treat changes in depreciation estimates?

A

the book value at the beginning of the current period is used as the basis for expense recognition over the asset’s remaining useful life, along with new estimates of salvage value and useful life if necessary. The new method is applied as of the beginning of the period of change.

20
Q

What is an error ina prior period financial statement?

A

caused when information existed at the time the statements were prepared enabling correct reporting, but a misstatement was made causing erroneous recognition, measurement, or disclosure

21
Q

How do you correct an error in financial statements?

A

restatement

22
Q

Waht is restatement?

A

The effect of the error correction on periods before those presented is reflected in the affected real accounts as of the beginning of the earliest period presented, including an adjustment to the opening balance of retained earnings (prior period adjustment) for that period, for the effect of the change on all periods before that date;
The financial statements for prior periods presented comparatively are recast to reflect the effect of the error correction;
Through a journal entry, the beginning balance of retained earnings in the year of the correction is adjusted to reflect the correct accounting through that date (prior period adjustment).

23
Q

What is a counter balancing error?

A

“self-correct” after a certain period of time if they are not corrected. These errors require no entry to correct retained earnings or other current account balance after the error counterbalances. However, prior year financial statements remain in erro