-Accounting Changes

Question 1

How are changes in accounting principle applied?

Answer 1

Retrospective Application:

• Prior Periods adjusted
• Retained Earnings adjusted
• Ex: LIFO to FIFO

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Question 2

Would a change from LIFO to FIFO be a change in accounting principle or a change of estimate? How would this change be applied?

Answer 2

A change from LIFO to FIFO is a change in accounting principle.

It is applied retrospectively.

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Question 3

How is a change in accounting estimate applied?

Answer 3

A change in accounting estimate is applied prospectively (going forward).

No backward adjustment is made.

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Question 4

Would a change from straight-line depreciation to double declining balance be a change in accounting principle or a change in an estimate? How would this change be applied?

Answer 4

Change in depreciation method would be a change in accounting estimate.

It is applied prospectively.

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Question 5

How is a correction of an accounting error made?

Answer 5

The cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements.

The correction of the error must be included in the footnotes.

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Question 6

What are the requirements for a prior period adjustment?

Answer 6

• Effect is Material
• Is identifiable in Prior Period
• Couldn’t be estimated in Prior Periods

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Question 7

How is a change from a non-GAAP accounting method to a GAAP method recorded?

Answer 7

It is treated as a correction of an accounting error.

The cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements.

Correction of the error must be included in the footnotes.

Question 8

How does an Inventory Error affect Ending Inventory and Net Income?

Answer 8

Affect on Ending Inventory & Affect on Net Income:

• If one is overstated, both overstated.
• If one is understated, both understated.

Misstating inventory corrects itself after TWO periods.

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Question 9

How is a change in entity recorded?

Answer 9

A change in an entity is applied retrospectively.

All prior periods presented for comparative purposes must reflect the change.

Footnote disclosures must be made by Changing to Consolidated Statements.

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