Documente Academic
Documente Profesional
Documente Cultură
Accounting Changes
Accounting alternatives:
1. Diminish the comparability of financial information.
2. Obscure useful historical trends.
Three Types of Accounting Changes:
Change in Accounting Principle: Retrospectively.
Change in Accounting Estimate: Prospectively.
Change in Reporting Entity: Retrospectively.
Errors are not considered an accounting change.
Change in Accounting Principle
A change from one generally accepted accounting principle to another is accounted for Retrospectively.
Examples include:
o Average cost to LIFO.
o Completed-contract to percentage-of-completion.
Exception: A Change in Accounting Principle that involves switching depreciation methods (or amortization or
depletion methods), is accounted for Prospectively. The FASB defines this special case as a Change in
Accounting Estimate effected through a Change in Accounting Principle.
All material errors from prior periods must be corrected as a Prior Period Adjustment.
Record corrections of errors from prior periods as an adjustment to the beginning balance of retained
earnings in the current period.
For comparative statements, a company should restate the prior statements affected, to correct for the
error.
Changes in accounting principle are appropriate only when a company demonstrates that the newly
adopted generally accepted accounting principle constitutes an improvement in financial
reporting.
Error Analysis
Balance Sheet and Income Statement Errors
Errors affecting both the balance sheet and the income statement can be:
1. Counterbalancing errors (or self-correcting over two accounting periods; e.g. EI error).
2. Noncounterbalancing errors (not self-correcting; e.g. depreciation expense error).
Ending Inventory Counter Balancing Error
EI error in the previous year becomes a BI error of the current year:
BI
Add net Purchases
Goods Available for Sale
Less EI
COGS
Chapter
22-5