Chapter 22 (Accounting Changes and Error Analysis)

Chapter 22 (Accounting Changes and Error Analysis) - 1....

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Unformatted text preview: 1. Identify the types of accounting changes. 2. Describe the accounting for changes in accounting principles. 3. Understand how to account for retrospective accounting changes. 4. Understand how to account for impracticable changes. 5. Describe the accounting for changes in estimates. 6. Identify changes in a reporting entity. 7. Describe the accounting for correction of errors. 8. Identify economic motives for changing accounting methods. 9. Analyze the effect of errors. Learning Objectives Changes in accounting principle Changes in accounting estimate Reporting a change in entity Reporting a correction of an error Summary Motivations for change of method Accounting Changes and Error Analysis Accounting Changes Error Analysis Balance sheet errors Income statement errors Balance sheet and income statement effects Comprehensive example Preparation of statements with error corrections Types of Accounting Changes: Changes in Accounting Principle. Changes in Accounting Estimate. Changes in Reporting Entity. Errors are not considered an accounting change. Accounting alternatives: 1) Diminish the comparability of financial information. 2) Obscure useful historical trend data. Accounting Changes Average cost to LIFO in inventory valuation. Completed-contract to percentage-of-completion in long-term contract accounting. Straight-line to declining balance method in depreciation accounting. A change from one generally accepted accounting principle to another. Examples include: Changes in Accounting Principle Adoption of a new principle in recognition of events that have occurred for the first time or that were previously immaterial is not a change in accounting principle. Further, a correction of an incorrectly applied current accounting principle is also not considered as a change in accounting principle but an error correction. Three approaches for reporting change in accounting principle: 1) Currently (cumulative effect): The difference in prior years income between the newly adopted and prior accounting principle should appear in the current income statement. Such cumulative effect should be reported (net of tax) as an irregular item. [Previous regulation] 2) Retrospectively: Recast the prior years financial statements based on new accounting principle as if the new principle had always been used. The cumulative effect of the change should be reported (net of tax) as an adjustment to the beginning retained earnings of the earliest year presented. 3) Prospectively (in the future): The new accounting principle should applied prospectively from the current year without making any adjustment to the beginning balances to reflect the change. FASB requires use of the retrospective approach in (2) above....
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This note was uploaded on 01/18/2011 for the course ACC 5115 taught by Professor Mitra during the Winter '10 term at Wayne State University.

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Chapter 22 (Accounting Changes and Error Analysis) - 1....

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