FAR-F1-M6-Accounting Changes and Error Corrections

Question 1

What are examples of a change in accounting estimate?

Answer 1

This is when you change the estimated useful life of PPE or when you change depreciation methods.

Question 2

What is the treatment of accounting estimate?

Answer 2

Prospective approach. The estimate is applied to the current year of change and moving forward. If change affects several future periods, affect on income should be disclosed in the notes to the financial statements.

Question 3

What are examples of a change in accounting principle?

Answer 3

This is a change from one GAAP principle to another, such as changes in inventory valuation approaches such as switching from LIFO to FIFO. Or a change in approach to defined benefit plan accounting

Question 4

What is the treatment of accounting principle?

Answer 4

Retrospective approach. The “cumulative change” is reflected by adjusting the beginning retained earnings of the earliest financial statement period presented, AND if prior period (comparative) financial statements are presented, they should be restated.

If the change is based on balance sheet items, the change is based on the balances at the end of the immediate prior year when the prior method was used. If the change is based on income statement items, we’d have to look at all of the past year’s in aggregate.

Question 5

What are examples of accounting error?

Answer 5

Any situation where it is clearly indicated as an error. For example, if the cash basis for financial reporting is used, that would be considered an error because it is not GAAP

Question 6

What is the treatment of an accounting error?

Answer 6

Retrospective approach. If comparative financial statements are presented and the year is presented, then correct the error in those prior financial statements presented (restatement)

If comparative financial statements are presented and the year is not presented, then adjust (net of tax) the opening retained earnings of the earliest year presented.

If comparative financial statements are not presented, then the error correction should be reported as an adjustment to the opening balance of retained earnings (net of tax)

Question 7

When does the risk of ownership pass to the buyer with FOB Shipping Point

Answer 7

Risk of ownership passes to buyer upon delivery to a common carrier under FOB Shipping Point

Question 8

When does the risk of ownership pass to the buyer with FOB Destination?

Answer 8

Risk of ownership passes to the buyer upon receipt of goods by the buyer.

Question 9

A change in depreciation method is treated as what type of accounting change?

Answer 9

A change in depreciation method is treated as a change in accounting estimate and is treated prospectively.

Question 10

When the effect of a change in accounting principle is INSEPERABLE from the effect of a change in accounting estimate, the reporting treatment is as a change in?

Answer 10

When the effect of a change in accounting principle is inseparable from the effect of a change in accounting estimate, the reporting treatment is as a CHANGE IN ESTIMATE.

Question 11

If a change in inventory valuation methods such as from weighted average method to LIFO method, this should be treated as a change in?

Answer 11

A change in inventory valuation methods, such as switching from weighted average to LIFO is impractical to estimate therefore it should be treated as a change in ESTIMATE.

On the other hand, if it is switching from LIFO to weighted average, this would be treated as a change in PRINCIPLE.