Lesson 17 Flashcards
What are the 3 types of accounting changes?
- Change in accounting principle
- Change in accounting estimate
- Change in reporting entity
What is a change in accounting principle?
A change from one GAAP to another. Example, a company may change from LIFO to FIFO.
What is a change in accounting estimate?
A change that occurs as the result of new information. Example, a company may change the useful life of its depreciable assets.
What is a change in reporting entity?
A change from reporting as one type to another type. Example, a company may change the subsidiaries for which it prepares consolidated financial statements.
What is an error in financial statements?
Errors result from mathematical mistakes, oversight, misuse of facts, mistakes in applying accounting principles.
What are the 3 approaches for reporting change in accounting principles?
- Report changes currently
- Report changes retrospectively
- Report changes prospectively
What is the cumulative effect?
It is the difference in prior years’ income between the newly adopted and prior accounting method.
What is the retrospective application?
It refers to the application of a different accounting principle to recast previously issued financial statements. - as if the new principle had always been used.
What approach for reporting changes in accounting principles is required by FASB?
The retrospective approach. Because it provides financial statement users with more useful information than the cumulative-effect or prospective (future) approaches.
What are the steps to change using the retrospective approach?
- It adjusts its financial statements for each prior period presented.
- It adjusts the carrying amounts of assets and liabilities as the beginning of the first year presented.
What is a direct effect?
Example, it is an adjustment to an inventory balance as a result of a change in the inventory valuation method. LIFO to FIFO.
What is an indirect effect?
It is any change to current or future cash flows of a company that results from making a change in accounting principle that is applied retrospectively.
