Mgmt 351 Study
22
Accounting Changes and Error Analysis
22-1
Accounting Changes and Error Analysis
Accounting Changes
Error Analysis
Changes in accounting policy
Changes in accounting estimate
Balance sheet errors
Income statement errors Balance sheet and income statement effects
Change in reporting entity
Correction of errors Summary Motivations for change of method
22-2
Comprehensive example
Preparation of statements with error corrections
Changes in Accounting Principle
Change from one accepted accounting policy to another. Examples include:
Average cost to LIFO. Completed-contract to percentage-of-completion.
Adoption of a new policy in recognition of events that have occurred for the first time or that were previously immaterial is not an accounting change.
22-4
Changes in Accounting Principle
Retrospective Accounting Change Approach
Company reporting the change
1) Adjusts its financial statements for each prior period
presented to the same basis as the new accounting principle.
2) Adjusts the carrying amounts of assets and liabilities as of the beginning of the first year presented, plus the opening balance of retained earnings.
22-5
Changes in Accounting Principle
E22-1 (Change in Principle—Long-Term Contracts): Cherokee
Construction Company changed from the completed-contract to the percentage-of-completion method of accounting for long-term construction contracts during 2012. For tax purposes, the company
employs the completed-contract method and will continue this approach in the future. (Hint: Adjust all tax consequences through the Deferred Tax Liability account.)
22-7
Changes in Accounting Principle
E22-1 (Change in policy—Long-Term Contracts):
Instructions: (assume a tax rate of 35%) (b) What entry(ies) are necessary to adjust the accounting records for the change in accounting principle? (a) What is the amount of net income and retained earnings that would be reported in 2012?
Accounting Changes and Error Analysis
22-1
Accounting Changes and Error Analysis
Accounting Changes
Error Analysis
Changes in accounting policy
Changes in accounting estimate
Balance sheet errors
Income statement errors Balance sheet and income statement effects
Change in reporting entity
Correction of errors Summary Motivations for change of method
22-2
Comprehensive example
Preparation of statements with error corrections
Changes in Accounting Principle
Change from one accepted accounting policy to another. Examples include:
Average cost to LIFO. Completed-contract to percentage-of-completion.
Adoption of a new policy in recognition of events that have occurred for the first time or that were previously immaterial is not an accounting change.
22-4
Changes in Accounting Principle
Retrospective Accounting Change Approach
Company reporting the change
1) Adjusts its financial statements for each prior period
presented to the same basis as the new accounting principle.
2) Adjusts the carrying amounts of assets and liabilities as of the beginning of the first year presented, plus the opening balance of retained earnings.
22-5
Changes in Accounting Principle
E22-1 (Change in Principle—Long-Term Contracts): Cherokee
Construction Company changed from the completed-contract to the percentage-of-completion method of accounting for long-term construction contracts during 2012. For tax purposes, the company
employs the completed-contract method and will continue this approach in the future. (Hint: Adjust all tax consequences through the Deferred Tax Liability account.)
22-7
Changes in Accounting Principle
E22-1 (Change in policy—Long-Term Contracts):
Instructions: (assume a tax rate of 35%) (b) What entry(ies) are necessary to adjust the accounting records for the change in accounting principle? (a) What is the amount of net income and retained earnings that would be reported in 2012?