Ch 22 Flashcards Preview

Financial Acct Systems 2 > Ch 22 > Flashcards

Flashcards in Ch 22 Deck (47):
0

FASB established reporting framework for 3 types of accounting changes

1 change in accounting principle

2 change in accounting estimate

3 change in reporting entity

1

Change in accounting principle

Change in one generally accepted accounting principle
to another

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

2

Change in accounting estimate

Change that occurs as result of new information or
Additional experience

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

3

Change in reporting entity

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

4

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

Errors in financial statements

5

Adoption of a new principle

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

6

3 possible approaches for reporting changes in accounting principles

1 report changes currently

2 report changes retrospectively

3 report changes prospectively

7

Report changes currently

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

8

Cumulative effect

Difference in prior year's income between newly adopted
And prior accounting method

9

Report changes retrospectively: Retrospective application

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

Recast as if new principle had always been used

10

Report changes prospectively

Principle applied to future financial statements

Current and past financial statements aren't affected

11

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

Retrospective approach

12

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

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

13

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

It stays the same

14

Example of direct effect

Adjustment to inventory balance as result of change in
Inventory valuation method

15

Indirect effect

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

16

Retrospective application is considered impracticable is a company...

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

17

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

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

18

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

Company prospectively applies new accounting principle
Of earliest date it's practical to do so

19

What 7 items require changes in future estimates?

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

20

How are changes in accounting estimates reported?

Reported prospectively

Viewed as normal recurring corrections and adjustments

21

Calculating depreciation charge (equation)

Depreciation charge = book value of asset/remaining service life

22

Companies account for a change in depreciation methods as a...

Change in estimate effected by a change in accounting
principle

23

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

Changing financial statements of all prior periods presented

24

4 examples in change of reporting entities

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

25

Accounting error types: Expense recognition

Recording expenses in incorrect period or incorrect amount

26

Accounting error types: revenue recognition

Improper revenue accounting, including questionable revenue
Recognized, misreported revenue

27

Accounting error types: misclassification

Misclassifying significant items on BS, IS or Sof Cashflows

28

Accounting error types: equity

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

29

Accounting error types: reserves/contingencies

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

30

Accounting error types: long lived assets

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

31

Accounting error types: taxes

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

32

Accounting error types: equity-other comprehensive income

Improper accounting for other comprehensive income equity
Transactions

Includes foreign currency items, unrealized G/L on debt or
Equity or derivatives

33

Accounting error types: equity-stock options

Improper accounting for employee stock options

34

Other accounting errors would relate to...

Acquisitions or mergers

35

Corrections of errors

Recorded as soon as found

Adjustment is made to beginning balance of retained
earnings in current period

36

Prior period adjustments

Adjustment to beginning balance of retained earnings
In current period

37

Restatement

Used for process of revising previously issued financial
Statements

38

Reasons companies prefer certain accounting methods?

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

39

Economic consequence arguments

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

40

What is an important element of faithful representation?

Neutrality

41

Counterbalancing errors

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

42

Non counterbalancing errors

Those that aren't offset in next accounting period

Ex. Failure to capitalize equipment that has useful life of
5 years

43

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

No entry is necessary

44

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

Make entry to adjust present balance of retained earnings

45

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

Make entry to correct error in current period

And adjust beginning balance of retained earnings

46

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

Make entry to adjust beginning balance of retained earnings