feb12slides - ACCOUNTING CHANGES Type of Accounting Change Definition Change in Accounting Principle Change fromone GAAP method to another GAAP

feb12slides - ACCOUNTING CHANGES Type of Accounting...

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Type of Accounting Change Definition Change in Accounting Principle Change from one GAAP method to another GAAP method Change in Accounting Estimate Revision of an estimate because of new information or new experience Change in Reporting Entity Preparation of financial statements for an accounting entity other than the entity that existed in the previous period ACCOUNTING CHANGES
CHANGE IN ACCOUNTING PRINCIPLE Occurs when changing from one GAAP method to another GAAP method, f or example, a change from LIFO to FIFO. Most voluntary changes in accounting principles are accounted for retrospectively by revising prior years’ financial statements. Changes in depreciation, amortization, or depletion methods are accounted for in a similar way as a change in accounting estimate .
Example: Change in Accounting Principle (Inventory Methods) During 2011 (its first year of operations) and 2012, Batali Foods used the FIFO inventory costing method. At the beginning of 2013, Batali decided to change to the average method for both financial reporting and tax purposes. Assume its income tax rate was 20%. Income components before income tax for 2013, 2012, and 2011 were as follows ($ in millions): 2013 2012 2011 Revenues $ 420 $ 390 $ 380 Cost of goods sold (FIFO) n/a (40 ) (38 ) Cost of goods sold (average) (62 ) (56 ) (52 ) Operating expenses (254 ) (250 ) (242 )
Example: Change in Accounting Principle (Inventory Methods) During 2011 (its first year of operations) and 2012, Batali Foods used the FIFO inventory costing method. At the beginning of 2013, Batali decided to change to the average method for both financial reporting and tax purposes. Assume its income tax rate was 20%. Income components before income tax for 2013, 2012, and 2011 were as follows ($ in millions): 2013 2012 2011 Revenues $ 420 $ 390 $ 380 Cost of goods sold (FIFO) n/a (40 ) (38 ) Cost of goods sold (average) (62 ) (56 ) (52 ) Operating expenses (254 ) (250 ) (242 ) ($ in millions) 2012 2011 Total Cost of goods sold (FIFO) 40 38 Cost of goods sold (average) 56 52 Difference 16 14 30
Example: Change in Accounting Principle (Inventory Methods) During 2011 (its first year of operations) and 2012, Batali Foods used the FIFO inventory costing method. At the beginning of 2013, Batali decided to change to the average method for both financial reporting and tax purposes. Income components before income tax for 2013, 2012, and 2011 were as follows ($ in millions): 2013 2012 2011 Revenues $ 420 $ 390 $ 380 Cost of goods sold (FIFO) n/a (40 ) (38 ) Cost of goods sold (average) (62 ) (56 ) (52 ) Operating expenses (254 ) (250 ) (242 ) ($ in millions) 2012 2011 Total Cost of goods sold (FIFO) 40 38 Cost of goods sold (average) 56 52 Difference 16 14 30 Since the cost of goods available for sale each period is the sum of the cost of goods sold and the cost of goods unsold (inventory), a $30 million difference ($16 + 14) in cost of goods sold due to using FIFO rather than Average means there also is a $30 million difference in inventory. The cumulative prior year difference in cost of goods sold is reflected as a difference in prior years’ pre-tax income. Therefore, there is a $30 million difference combined in retained earnings and income taxes payable.
Example: Change in Accounting Principle (Inventory Methods) ($ in millions) 2012 2011 Total

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