What are the three types of Accounting changes?
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Terms in this set (26)
Retrospective Approach?Adjusts its financial statements for each prior period presented to the same basis as the new accounting principle Adjusts the carrying amounts of assets and liabilities as of the beginning of the first year presented, plus the opening balance of retained earningsProspective ApproachIn this approach, previously reported results remain As a result, companies do not adjust opening balances to reflect the change in principleChange in Accounting Principle ImpractibilityCompanies should not use retrospective application if one of the following conditions exists: 1. Company cannot determine the effects of the retrospective application. 2. Retrospective application requires significant estimates that the company cannot develop *If any of the above conditions exists, the company prospectively applies the new accounting principle*Change in Accounting EstimateChanges in accounting estimates are reported prospectively FASB views changes in estimates as normal recurring corrections and adjustments and prohibits retrospective treatmentChanges in Accounting Estimate Examples1. Uncollectible 2. Inventory obsolescence 3. Useful lives and salvage values and assets 4. Periods benefits by deferred costs 5. Liabilities for warranty costs and income taxes 6. Recoverable mineral reserves 7. Change in depreciation methods *Be careful*Change in Reporting Entity Examples1. Presenting consolidated statements in place of statements of individual companies 2. Change specific subsidiaries that constitute the group of companies for which the entity presents consolidated financial statements 3. Changing the companies included in combined financial statements 4. Changing the cost, equity, or consolidation method of accounting for subsidiaries and investmentsA change in reporting entity requires that the financial statement of prior periods be ____________________ revised to report the financial information for he new reporting entity in all periodsretrospectivelyAccount ______________ in changes in Accounting PayableretrospectivelyAccounting ErrorsAll material errors must be correctedAccounting errors Companies treat errors as _____________ -____________ ___________________ and report them in the current year as adjustments to the beginning balance of Retained Earnings in the current periodprior-period adjustmentsAccounting Errors For all years disclosed, financial statements are ________________ _____________ to reflect the error correctionretrospectively restatedWhat are Types of Accounting Errors?1. A change from an accounting principle that is not generally accepted to an accounting equity that is acceptable 2. Mathematical mistakes 3. Changes in estimates that occur because a company did not prepare the estimates in good faith 4. Failure to accrue or defer certain expenses or revenues 5. Misuse of facts 6. Incorrect classification of a cost as an expense instead of an asset, and vice versa.Examples of Error Correction?Comparative StatementsWhen an error correction is done, what should companies do?1. Make adjustments to correct the amounts for all affected accounts reported in the statements for all periods reported. 2. Restate the data to the correct basis for each year presented. 3. Show any catch-up adjustment as a prior period adjustment to retained earnings for the earliest period it reportedSummary of Changes and Errors: Changes in Accounting Principle **KNOW**Changes in Accounting Principle Employ the retrospective approach by: a. Changing the financial statements of all prior periods presented b. Disclosing in the year of the change the effect on net income and earnings per share for all prior periods presented c Reporting an adjustment to the beginning retained earnings balance in the retained earnings statement in the earliest year presented. If impracticable to determine the prior period effect (e.g., change to LIFO): a. Do not change prior years' income b. Use opening inventory in the year the method is adopted as the base-year inventory for all subsequent LIFO computations c. Disclose the effect of the change on the current year, and the reasons for omitting the computation of the cumulative effect and pro format amounts for prior yearsSummary of Changes and Errors: Changes in accounting estimate, changes in reporting entity, changes due to error **Changes in accounting estimate: Employ the current and prospective approach by: a. Reporting current and future financial statements on the new basis b. Presenting prior period financial statements on the new basis. c. Making no adjustments to current-period opening balances for the effects in prior periods Changes in reporting entity: Employ the retrospective approach by: a. Restating the financial statements of all prior period presented b. Disclosing in the year of change the effect on net income and earnings per share data for all prior periods presented Changes due to error: Employ the restatement approach by: a. Correcting all prior period statements presented. b. Restating the beginning balance of retained earnings for the first period presented when the error effects occur in a period prior to the first period presented