F2-M2 Accntg Changes and Error Corrections Flashcards
Per US GAAP, which of the following statements is correct regarding accounting changes that result in financial statements that are, in effect, the statements of a different reporting entity?
The financial statements of all prior period presented should be restated.
Financial statements of all prior periods presented should be restated when there is a “change in entity” such as resulting from:
1. Changing companies in consolidated financial statements
1. Consolidated financial statements versus previous individual financial statements
How should the effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate be reported?
As a component of income from continuing operations
When the effect of a change in accounting principle is inseparable from the effect of a change in accounting estimate, the reporting treatment for the overall effect is as a change in estimate.
Thus, the effect is reported prospectively as a component of income from continuing operations.
Which of the following statements is correct as it related to changes in accounting estimates?
Whenever it is impossible to determine whether a change in accounting estimate or a change in accounting principle has occurred, the change should be considered a change in estimate.
How should the company present the Year 1 effect of the change in accounting principle in its Year 3 comparative financial statements?
1/1/Year 3 changed inventory costing method from LIFO to FIFO
Y3 statements contain comparative info for Y2
As an adjustments to the beginning Year 2 inventory balance with an offsetting adjustment to beginning Year RE.
If comparative financial statements are presented, the cumulative effect of a change in accounting principle is presented net of tax as an adjustment to beginning RE in Stmt of Stockholder’s equity.
When there is a change in the reporting entity, how should the change be reported in the financial statements?
Retrospectively, including note disclosures, and application to all prior period financial statements presented.
If comparative financial statements are presented and a change of reporting entity has occurred,
all previous financial statements that are presented in the comparative financial statement should be restated.
The error affects the financial statements that were issued in Year 1 and 2. How should the company report the error?
Co. prepare 3 year comparative FS.
Error discovered in previous FS for Year 1
The financial statements for Years 1 and 2 should be restated; the cumulative effect of the error on Years 1 and 2 should be reflected in the carrying amounts of assets and liabilities as of the beginning of Year 3
FS for Year 1 and 2 should be restated.
The carrying amounts of the assets and liabilities for these years will be corrected in each year’s financial statements and shows as restated in the three year comparative financial statements.
As of the beginning of Year 3, the cumulative effect of the error will have been corrected and reflected in the carrying amounts of the affected assets and liabilities.
The cumulative effect of this change should be reported in Lore’s current year financial statement as a:
Prior period adjustment resulting from the correction of an error.
The cash basis for financial reporting is not a generally accepted accounting basis of accounting (GAAP); therefore it is an error.
Correction of an error from a prior period is reported as a prior period adjustment related to RE.
Under GAAP, if a company is not presented comparative financial statements, the correction of an error in the financial statements of a prior period should be reported, net of applicable income taxes, in the current:
RE Statement as an adjustment of the opening balance.
