Ch 22Accoutning Changes and Error Analysis – Flashcards
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Which of the following is not one of the three types of accounting changes?
Change in the estimated useful life of an asset.
Change from LIFO to FIFO.
Correction of understated depreciation expense in a prior period .
Change in reporting entity.
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Correction of understated depreciation expense in a prior period
Errors in financial statements are not considered an accounting change.
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What approach does the FASB require when accounting for changes in accounting principle?
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The FASB requires the use of the retrospective approach
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All of the following are examples of a change in accounting principle except a change from:
the double-declining balance method to the straight-line method of depreciation.
average cost to LIFO inventory pricing.
FIFO to average cost.
the completed-contract to percentage-of-completion method of accounting for construction contracts.
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All of the options are examples of a change in accounting principle except a change from the double-declining balance method to the straight-line method of depreciation
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Types of Accounting Changes:
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Change in Accounting Policy.
Changes in Accounting Estimate.
Change in Reporting Entity.
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Three approaches for reporting changes:
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Currently.
Retrospectively.
Prospectively (in the future).
FASB requires use of the retrospective approach
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Retrospective accounting approach (company reporting the change)
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1.adjust its financials to each prior period presented to the same basis as the new accounting principle
2.adjust the carrying amounts of assets and liabilities as of the being of the first year presented plus the opening balance of retained earnings
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On January 1, 2014, Columbia Corp. changed its inventory method to FIFO from LIFO for both financial and income tax reporting purposes. The change resulted in a $2,320,000 increase in the January 1, 2014 inventory. Assume that the income tax rate for all years is 25%. The cumulative effect of the accounting change should be reported by Columbia in its 2014
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retained earnings statement as a $1,740,000 addition to the beginning balance.
$2,320,000 × (100% - 25%) = $1,740,000.
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A change to LIFO inventory valuation from any other acceptable inventory valuation method:
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requires no restatement of prior years' income.
No restatement is required because it would be too difficult and therefore impractical.
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T/F A change in the useful life and salvage value of a depreciable asset is handled retrospectively.
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True, Changes in estimates are handled currently and prospectively.
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Which type of accounting change should always be accounted for in current and future periods?
Change in accounting estimate
Correction of an error
Change in accounting principle
Change in reporting entity
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Change in accounting estimate
A change in an accounting estimate should always be accounted for in current and future periods.
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When a company changes from an accelerated method to the straight-line method of depreciation, this change should be handled as a
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a change in accounting estimate
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Whenever it is impossible to determine whether a change in principle or a change in estimate has occurred, the change should be considered a:
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Whenever it is impossible to determine the type of change that has occurred, it is to be considered a change in estimate.
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What describes a change in reporting entity?
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Changing the companies included in combined financial statements describes a change in reporting entity.
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In 2013, PWT Company failed to record depreciation expense on some of its assets. When the error is discovered in 2014, it will be accounted for:
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as a prior period adjustment.
