Chapter 4 The Income Statement and Statement of Cash Flows14

Chapter 4 The Income Statement and Statement of Cash Flows14

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Brief Exercise 4-10 The change in inventory method is a change in accounting principle. The depreciation method change is considered to be a change in accounting estimate that is achieved by a change in accounting principle and is accounted for prospectively, exactly as we would account for any other change in estimate. The inventory method change, however, is accounted for by retrospectively recasting prior years’ financial statements presented with the current year for comparative purposes, applying the new inventory method (FIFO in this case) in those years. Brief Exercise 4-11 This is a change in accounting estimate. When an estimate is revised as new information comes to light, accounting for the change in estimate is quite straightforward.
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Unformatted text preview: We do not restate prior years' financial statements to reflect the new estimate. Instead, we merely incorporate the new estimate in any related accounting determinations from there on. If the after-tax income effect of the change in estimate is material, the effect on net income and earnings per share must be disclosed in a note, along with the justification for the change. Depreciation for 2011 is $25,000: $300,000 Cost $ 50,000 Previous annual depreciation ($300,000 ÷ 6 years) x 2 years 100,000 Depreciation to date (2009-2010) 200,000 Book value __ ÷ 8 yrs. Estimated remaining life (10 years - 2 years) $ 25,000 New annual depreciation...
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This note was uploaded on 01/08/2011 for the course -2 20101 taught by Professor Georgesanchez during the Spring '10 term at USC.

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