Ch 22 HWq - Chapter 22 Homework Questions Q1 What are the...

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Chapter 22 Homework Questions Q1 What are the major reasons why companies change accounting methods? The major reasons why companies change accounting methods are: (1) Desire to show better profit picture. (2) Desire to increase cash flows through reduction in income taxes. (3) Requirement by Financial Accounting Standards Board to change accounting methods. (4) Desire to follow industry practices. (5) Desire to show a better measure of the company’s income. Q2. State how each of the following items is reflected in the financials: (a) FIFO to LIFO Change in accounting principle; retrospective application is generally not made because it is impracticable to determine the effect of the change on prior years. The FIFO inventory amount is therefore generally the beginning inventory in the current period. (b) Depr not recorded. Correction of an error and therefore prior period adjustment; adjust the beginning balance of retained earnings. (c) Litigation from prior year won Increase income for litigation settlement. (d) Change in realizability of receivables. Change in accounting estimate; currently and prospectively. Part of operating section of income statement. (e) Writeoff of receivables Reduction of accounts receivable and the allowance for doubtful accounts. (f) Change from POC. Change in accounting principle; retrospective application to prior period financial statements. Q3 Discuss briefly the three approaches that have been suggested for reporting changes in accounting principles. The three approaches suggested for reporting changes in accounting principles are: (a) Currently—the cumulative effect of the change is reported in the current year’s income as a special item.
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(b) Retrospectively—the cumulative effect of the change is reported as an adjustment to retained earnings. The prior year’s statements are changed on a basis consistent with the newly adopted principle. (c) Prospectively—no adjustment is made for the cumulative effect of the change. Previously reported results remain unchanged. The change shall be accounted for in the period of the change and in subsequent periods if the change affects future periods. Q4. Identify and describe the approach the FASB requires for reporting changes in principle. The FASB believes that the retrospective approach provides financial statement users the most useful information. Under this approach, the prior statements are changed on a basis consistent with the newly adopted standard; any cumulative effect of the change for prior periods is recorded as an adjustment to the beginning balance of retained earnings of the earliest period reported. Q6. Define a change in estimate and provide an illustration. When is a change in estimate affected by a change in accounting principle?
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