302Chapter 20 notes

302Chapter 20 notes - 1 LEARNING OBJECTIVES 1. CHAPTER 20...

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1 C HAPTER 20 Accounting Changes and Error Corrections L EARNING O BJECTIVES 1. Understand the three different types of accounting changes that have been identified by accounting standard setters. Three different types of accounting changes: < Change in accounting estimate. < Change in accounting principle. < Change in reporting entity. The distinction among the three is important as different accounting treatment and disclosure is required for each type of accounting change. 2. Recognize the difference between a change in accounting estimate and a change in accounting principle, and know how a change in accounting estimate is reflected in the financial statements. A change in estimate does not involve a restatement of prior-period financial statements. The effects of these changes are reflected in the current and future periods. Refer to Chapter 6 for the discussion on bad debt expense, Chapter 12 for the discussion on depreciation, and Chapter 17 for the discussion on actuarial assumptions. 3. Determine if a change in accounting principle requires a cumulative adjustment relating to its effect or a restatement of prior periods’ financial statements, and be able to compute the necessary adjustment. Changes in accounting principle can be one of two types. < The more general case involves reporting a cumulative adjustment on the income statement in the period of the change. < Pro forma information is also provided in the notes disclosing the effect on net income in prior periods of the new accounting method. In certain cases, a change in accounting principle is accounted for by adjusting the beginning retained earnings balance for the earliest year being 1
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2 reported and then restating the income statement for each year being reported to reflect the new accounting method. 2
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3 4. Determine when a change in reporting entity has occurred, and understand the disclosure requirements associated with this change. A change in reporting entity includes preparing consolidated financial statements for the first time, significantly changing specific subsidiaries included in consolidated financial statements, or accounting for a business combination as a pooling of interests. In these instances, prior years’ financial statements are restated to reflect the results of operations as if the current reporting entity had been in existence for the entire reporting time. 5. Recognize the various types of errors that can occur in the accounting process, understand when errors counterbalance, and be able to correct errors when necessary. Many accounting errors will be discovered and corrected in the normal course of business. Some errors will be detected after the books have been closed for an accounting period, thereby requiring an adjustment to retained earnings. Most errors that go undetected counterbalance over a two-year period,
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302Chapter 20 notes - 1 LEARNING OBJECTIVES 1. CHAPTER 20...

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