Ch 22

Question 0

Change in accounting principle

Answer 0

Change in one generally accepted accounting principle
to another

Ex. Company changes inventory valuation from LIFO to
Avg. cost

Question 1

FASB established reporting framework for 3 types of accounting changes

Answer 1

1 change in accounting principle

2 change in accounting estimate

3 change in reporting entity

Question 2

Change in accounting estimate

Answer 2

Change that occurs as result of new information or
Additional experience

Ex. Company may change its estimate of useful lives of
Depreciable assets

Question 3

Change in reporting entity

Answer 3

Change from reporting as one type of entity to another
Type of entity

Ex. Company may change the subsidiaries for which it
Prepares consolidated financial statements

Question 4

4 category that necessitates changes in accounting, though it’s not classified as an accounting change

Answer 4

Errors in financial statements

Question 5

Adoption of a new principle

Answer 5

Recognition of events that have occurred for first time
Or that were previously immaterial

Not an accounting change

Ex. Adopting inventory method for newly acquired items

Question 6

3 possible approaches for reporting changes in accounting principles

Answer 6

1 report changes currently

2 report changes retrospectively

3 report changes prospectively

Question 7

Report changes currently

Answer 7

Companies report cumulative effect of change in current
Year’s income statement as an irregular item

Effect of change on prior year’s income appears only in
Current year income statement

Question 8

Cumulative effect

Answer 8

Difference in prior year’s income between newly adopted

And prior accounting method

Question 9

Report changes retrospectively: Retrospective application

Answer 9

Refers to application of different accounting principle to
Recast previously issued financial statements

Recast as if new principle had always been used

Question 10

Report changes prospectively

Answer 10

Principle applied to future financial statements

Current and past financial statements aren’t affected

Question 11

Which of the 3 possible approaches for reporting changes in accounting principles does FASB prefer?

Answer 11

Retrospective approach

Question 12

When a company changes an accounting principle, what are 2 ways it reports a change applying retrospective application?

Answer 12

1 it adjusts financial statements for each prior period
presented

2 it adjusts carrying amounts of assets and liabilities as
Beginning of first year presented

Question 13

What happens to the cashflow statement, when accounting principle for reporting inventory is changed from FIFO to LIFO

Answer 13

It stays the same

Question 14

Example of direct effect

Answer 14

Adjustment to inventory balance as result of change in

Inventory valuation method

Question 15

Indirect effect

Answer 15

Any change to current or future cashflows of company that
Result from making change in accounting principle that’s
Applied retrospectively

Indirect effects do not change prior period amounts

Question 16

Retrospective application is considered impracticable is a company…

Answer 16

Can’t determine prior period effects using reasonable efforts
To do so

Question 17

Companies should not use retrospective application if 1 of the following 3 conditions exists

Answer 17

1 company can’t determine effects of retrospective application
2 retrospective application requires assumptions about
Management’s intent in prior period
3 retrospective application requires significant estimates
That can’t objectively be verified

Question 18

When retrospective application is impracticable, what does a company apply?

Answer 18

Company prospectively applies new accounting principle

Of earliest date it’s practical to do so

Question 19

What 7 items require changes in future estimates?

Answer 19

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

Question 20

How are changes in accounting estimates reported?

Answer 20

Reported prospectively

Viewed as normal recurring corrections and adjustments

Question 21

Calculating depreciation charge (equation)

Answer 21

Depreciation charge = book value of asset/remaining service life

Question 22

Companies account for a change in depreciation methods as a…

Answer 22

Change in estimate effected by a change in accounting

principle

Question 23

Changes in reporting entity: in such cases companies report Change by…

Answer 23

Changing financial statements of all prior periods presented

Question 24

4 examples in change of reporting entities

Answer 24

1 consolidated financial statements for individual companies 2 changing specific subsidiaries 3 changing companies in combined financial statements 4 changing cost, equity or consolidation method for Subsidiary and investments

Question 25

Accounting error types: Expense recognition

Answer 25

Recording expenses in incorrect period or incorrect amount

Question 26

Accounting error types: revenue recognition

Answer 26

Improper revenue accounting, including questionable revenue | Recognized, misreported revenue

Question 27

Accounting error types: misclassification

Answer 27

Misclassifying significant items on BS, IS or Sof Cashflows

Question 28

Accounting error types: equity

Answer 28

Improper accounting for EPS, restricted stock, warrants | And other equity instruments

Question 29

Accounting error types: reserves/contingencies

Answer 29

Errors involving bad debts related to A/R, inventory reserves, Income tax allowances, loss contingencies

Question 30

Accounting error types: long lived assets

Answer 30

Asset impairments of property, plant, equipment, goodwill | Or other related items

Question 31

Accounting error types: taxes

Answer 31

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

Question 32

Accounting error types: equity-other comprehensive income

Answer 32

Improper accounting for other comprehensive income equity Transactions Includes foreign currency items, unrealized G/L on debt or Equity or derivatives

Question 33

Accounting error types: equity-stock options

Answer 33

Improper accounting for employee stock options

Question 34

Other accounting errors would relate to...

Answer 34

Acquisitions or mergers

Question 35

Corrections of errors

Answer 35

Recorded as soon as found Adjustment is made to beginning balance of retained earnings in current period

Question 36

Prior period adjustments

Answer 36

Adjustment to beginning balance of retained earnings | In current period

Question 37

Restatement

Answer 37

Used for process of revising previously issued financial | Statements

Question 38

Reasons companies prefer certain accounting methods?

Answer 38

1 political costs 2 capital structure 3 bonus payments 4 smooth earnings

Question 39

Economic consequence arguments

Answer 39

Focus on impact of accounting method on behavior of Investors, creditors, competitors, governments or company Managers

Question 40

What is an important element of faithful representation?

Answer 40

Neutrality

Question 41

Counterbalancing errors

Answer 41

Those that will be offset or corrected over 2 periods Ex. Failure to record accrued wages is counterbalancing Error b/c over 2 yr. period error will no longer be present

Question 42

Non counterbalancing errors

Answer 42

Those that aren't offset in next accounting period Ex. Failure to capitalize equipment that has useful life of 5 years

Question 43

If a company has closed the books in the current year: If error is already counter balanced

Answer 43

No entry is necessary

Question 44

If a company has closed the books in the current year: if error is not yet counterbalanced

Answer 44

Make entry to adjust present balance of retained earnings

Question 45

If a company has not closed the books in the current year: If error is already counterbalanced

Answer 45

Make entry to correct error in current period And adjust beginning balance of retained earnings

Question 46

If a company has not closed the books in the current year: if error is not yet counterbalanced

Answer 46

Make entry to adjust beginning balance of retained earnings