Chapter 4 The Income Statement and Statement of Cash Flows3

Chapter 4 The Income Statement and Statement of Cash Flows3

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Answers to Questions (continued) Question 4-11 GAAP permit alternative treatments for similar transactions. Common examples are the choice among FIFO, LIFO, and average cost for the measurement of inventory and the choice among alternative revenue recognition methods. A change in accounting principle occurs when a company changes from one generally accepted treatment to another. In general, we report voluntary changes in accounting principles retrospectively. This means revising all previous periods’ financial statements as if the new method were used in those periods. In other words, for each year in the comparative statements reported, we revise the balance of each account affected. Specifically, we make those statements appear as if the newly adopted accounting method had been applied all along. Also, if retained earnings is one of the accounts whose balance requires adjustment (and it usually is), we revise the beginning balance of retained earnings for the earliest period reported in the comparative statements of shareholders’ equity (or statements of retained
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This note was uploaded on 01/08/2011 for the course COMM 140x taught by Professor Carver during the Spring '10 term at USC.

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