Question

The following are three independent, unrelated sets of facts relating to accounting changes.

Situation 1: Sanford Company is in the process of having its first audit. The company has used the cash basis of accounting for revenue recognition. Sanford president, B. J. Jimenez, is willing to change to the accrual method of revenue recognition.
Situation 2: Hopkins Co. decides in January 2018 to change from FIFO to weighted-average pricing for its inventories.
Situation 3: Marshall Co. determined that the depreciable lives of its fixed assets are too long at present to fairly match the cost of the fixed assets with the revenue produced. The company decided at the beginning of the current year to reduce the depreciable lives of all of its existing fixed assets by 5 years.

For each of the situations described, provide the information indicated below.

Type of accounting change.

Manner of reporting the change under current generally accepted accounting principles, including a discussion where applicable of how amounts are computed.

Effect of the change on the balance sheet and income statement.

Answer 1

All the three given situations are subject to the change in the accounting policies of the concerned company. A change in accounting policies should be made in the following condition:

1. Adoption of the new accounting policies is required by the statute or to be under the compliance of the Accounting Standards.

2. It is considered that the change would result in a more appropriate presentation of financial statement.

If there is any change in accounting policies in preparation of financial statement from one period to subsequent period and such change affects the state of affairs of the balance sheet and the profit and loss account of the current period or the financial statement of the later period, then such change must be disclosed in the financial statement. The amount, by which the financial statement is affected, should be disclosed to the extent ascertainable.

Situation 1:

As said above, Sanford has to disclose the fact that the company is going to change the accounting basis. The company has to state the period from when she is starting to adopt the accrual method of revenue recognition in the subsequent period. She has to state the reason for this change. To convert the Cash Basis to Accrual Basis, it has to go through the following steps.

• Add accrued expenses.
• Subtract cash payments.
• Add prepaid expenses.
• Add accounts receivable.
• Subtract cash receipts
• Subtract customer prepayments.

Situation 2:

In this situation, Hopkins Co. is about to change its inventory consumption policies. As before company was going under FIFO(First in First out) method for inventory management, But, company is now planning to adopt a new way of calculating closing inventory. This policy will definitely change the figure of closing stock in the company's Balance Sheet. It will affect the profit of the company too. No doubt the weighted average method is the accurate alternative for inventory calculation. But, the company should make all the necessary disclosers in the financial statements. This new method should be applied from the start of a new accounting period.

Situation 3:

Marshall Co. is in the realization of the fact that their fixed assets are not going to stay as long as they were first ascertained to be. So it will be recommendable to reduce the depreciable life of the asset But the company will be obliged to disclose the fact in the financial statements. From the current accounting period, amount of depreciation on the remaining value of the assets will be calculated after considering the new estimated life of the asset and it will be subtracted from the WDV of the assets. The balance will be shown on the balance sheet of the current year.