Week 5 - Flashcards
Slides (17 cards)
What is a subsequent event?
Its an event that occurs after the reporting period before the financial statements are issued
What if something happens during the subsequent events period?
need to know if its an adjusting or non adjusting event
How to know if its an adjusting event?
1) Event occurs (where we find more information) during the subseuents period
2) Event provide evidence of conditions that existed at the end of the reporting period
If both are met its an adjustig event
What is a provision
It’s an amount a company sets aside on its financial statements to cover a future cost or loss that is likely to happen, even if the exact amount or date is not known.
How to know if somehting is a provision
1) Present obligation as the result og a past event
2) Probable outflow of economic resources
3) Reliable estimate
What are examples of adjusting entries?
1) Asset impairement
2) Customer bankruptcy
3) NRV < cost
What do we do when there is an adjustment entry
Dr. Inventory write down (e)
Cr. Inventory (a)
What is a change in accounting policy?
A voluntary change in method (e.g., switching from FIFO to weighted average).
Treatment: Retrospective
(i.e., restate past periods as if the new policy was always used)
When is it a correction of error
When past information was wrong and should have been known.
Treatment: Retrospective
(i.e., restate past periods as if the new policy was always used)
What is a change in estimate?
A revision due to new information (e.g., change in useful life of asset).
Treatment: Prospective
(i.e., apply change going forward — don’t restate past)
What are the requirements for it to be a change in estimate?
1) The amount is a monetary figure subject to measurement uncertainty
(You don’t know them with certainty, so you use the best estimate available at the time.)
2) The change results from new information, developments, or experience
What are the requirements for it to be an prior period error?
1) Failure to use/misuse of info available at the time
→ They had info showing part of the cost was for a building.
2) Info should have been considered ✅
→ Allocating land vs. building is a normal accounting procedure.
Prior period error - retrospective correction
How to compute depreication
Cost - resideual value/ years
How to fix the correction of depreication in past
Dr. retained earings
Cr. Accumulated depreication
What does depreciation effect?
Income taxes as depreication reduces income taxes
What happens if a company does not record depreciation
Overstated net income
Overstated tax expense too, since depreciation reduces taxable income
What dos the journal entry look like to fix this depreication
Dr. Retained earnings are overstated
Dr. Income tax recievable (*multiply dep by 30%)
Cr. Depreiation
