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Accounting
Intermediate Accounting 2 - Chapter 22 Accounting Changes and Error Analysis
22
Accounting
Not Applicable
04/22/2004

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Term
Change In Accounting Principle
Definition
A change in one generally accepted accounting principle to another. Example: a change in the method of depreciation from double declining to straight line.
Term
Change in Accounting Estimate
Definition
A change that occurs as the result of new information or as additional experience is acquired. Example: a change in the estimate of the useful lives of depreciable assets.
Term
Change in Reporting Entity
Definition
A change from reporting as one type of entity to another type of entity. Example: changing specific subsidiaries that constitiute the group of companies for which consolidated financial statements are prepared.
Term
Correction of an Error
Definition
Treated as prior period adjustments, and they are recorded in the year in which the error was discovered and are reported in the financial statements as an adjustment to the beginning balance of retained earnings.
Term
Counterbalancing Errors
Definition
Errors that will be offset or corrected over two periods. Example: The failure to record accrued wages, because over a 2-year period the error will no longer be present.
Term
Retroactive Adjustment
Definition
Recasting the financial statements of prior years on a basis consistent with the newly adopted principle.
Term
Current Adjustment
Definition
Adjustment reported in the current year's income statement as a special item.
Term
Prospective Adjustment
Definition
Previously reported results remain, and no change is made.
Term
Non-Counterbalancing Errors
Definition
Errors that are not offset in the next accounting period. Example: failure to capitalize equipment that has a useful life of 5 years. Take more than 2 periods to correct themselves.
Term
Pro Forma
Definition
as if basis, as if the new principle had been applied during all periods affected.
Term
3 Types of accounting changes
Definition
1. Change in accounting principle 2. Change in accounting estimate 3. Change in reporting entity
Term
Describe the accounting for changes in principles.
Definition
One GAAP to another. A change is not resulting from adoption of a new principle in recognition of events that have occured for the first time or were previously immaterial. If previously used principle was incorrectly used, a change in GAAP would be a correction of an error.
Term
Understand Accounting for Cum-Effect Changes
Definition
Cumulative effect of the change should be shown at the bottom of the current year's income statement and that pro forma net income and earnings per share amounts be reported for all prior years.
Term
Understand Accounting for Retroactive Changes
Definition
Prior years' financials are recast on a basis consistent with the newly adopted principle, and any part of the effect attributable to years prior to those presented is treated as an adjustment of the earliest retained earnings presented.
Term
Understand Changes to LIFO
Definition
The base year inventory for all subsequent LIFO calculations is the opening inventory in the year the method is adopted. It is impractical to restate prior years.
Term
Describe accounting for changes in estimate
Definition
Must be handled prospectively, no changes should be made in previously reported results. No attempt is made to catch-up.
Term
Identify Changes in reporting entity
Definition
Should be reported by restating the financial statements of all prior periods presented, to show financial information for the new reporting entity for all periods.
Term
Describe accounting for correction of errors
Definition
Erros must be corrected by proper entries in the accounts and reported to the financial statements. Treated as prior period adjustments and recorded in the year where the error was discovered. As an adjustment to the beginning balance of retained earnings.
Term
Identify economic motives for changing accounting methods (4)
Definition
1. Political Costs 2. Capital Structure 3. Bonus paments 4. Smooth earnings
Term
Balance sheet errors
Definition
Accect only the presentation of an asset, liability, or equity account.
Term
Income statement errors
Definition
Affect only the presentation of the nominal accounts in the income statement
Term
Balance and Income Statement Effects
Definition
Counterbalancing (will be offset or corrected in 2 periods) and Noncounterbalancing (will not be offset in 2 periods).
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