Chapter 22-Before - CHAPTER 22 ACCOUNTING CHANGES AND ERROR...

This preview shows page 1 - 8 out of 57 pages.

We have textbook solutions for you!
The document you are viewing contains questions related to this textbook.
College Accounting, Chapters 1-27
The document you are viewing contains questions related to this textbook.
Chapter 5 / Exercise 5
College Accounting, Chapters 1-27
Heintz/Parry
Expert Verified
CHAPTER 22ACCOUNTING CHANGES AND ERROR ANALYSISSommers – Intermediate I
We have textbook solutions for you!
The document you are viewing contains questions related to this textbook.
College Accounting, Chapters 1-27
The document you are viewing contains questions related to this textbook.
Chapter 5 / Exercise 5
College Accounting, Chapters 1-27
Heintz/Parry
Expert Verified
Accounting ChangesFor accounting purposes, we classify accounting changes into three categories. Accounting changes are categorized as:1.Changes in policy (when companies switch from one acceptable accounting method to another)2.Changes in estimate (when new information causes companies to revise estimates made previously)3.Changes in reporting entity (the group of companies comprising the reporting entity changes)Correction of an error is NOTconsidered an accounting change
Discussion QuestionsQ22-4 Identify and describe the approach the FASB requires for reporting changes in accounting principles.
Change in Accounting PolicyChange from one GAAP to anotherAdopt a new FASB standardChange methods of inventory costingChange from cost method to equity method, or vice versaChange from completed contract to percentage-of-completion, or vice versa
Changes in Accounting PrincipleRetrospective Accounting Change ApproachCompany reporting the changeAdjusts 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 earnings.
Retrospective ApproachRevise prior years’ statements (that are presented for comparative purposes) to reflect the impact of the change.The balance in each account affected is revised to appear as if the newly adopted accounted method had been applied all along or that the error had never occurred.Adjust the beginning balance of retained earnings for the earliest period reported.In the first set of financial statements after the change is made, a disclosure note is needed to:Provide justification for the change.Point out that comparative information has been revised.Report any per share amounts affected for the current and all prior periods.
Example 1Rockwell Corporation uses a periodic inventory system and has used the FIFO cost method since inception of the company in 1976. In 2011, the company decided to switch to the average cost method. Data for 2011 are as follows:Beginning inventory, FIFO (5,000 units @ $30)$150,000Purchases: 5,000 units @ $ 36 $180,0005,000 units @ $ 40200,000380,000Cost of goods available for sale$530,000Sales for 2011 (8,000 units @ $70)$560,000Additional Information:The company’s effective income tax rate is 40% for all years.If the company had used the average cost method prior to 2011, ending inventory for 2010 would have been $130,000.7,000 units remained in inventory at the end of 2011.Ignoring income taxes, prepare the 2011 journal entry to adjust the accounts to reflect the average cost method.What is the effect of the change in methods on 2011 net income?

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture