Question

Answer the questions listed below in detail.

1.What are the types of accounting changes? Give examples. Try to find a company that has reported an accounting change recently. What are the major reasons why companies change accounting methods? The Wall Street Journal has several examples.

2. What are accounting errors and how are they reported? What are the disclosure requirements for correction of errors? See FASB codification as backup.

3. Define a change in estimate and provide an illustration. When is a change in accounting estimate effected by a change in accounting principle?

4. Distinguish between counterbalancing and noncounterbalancing errors. Give an example of each.

5. Discuss how a change to the LIFO method of inventory valuation is handled when it is impractical to determine previous LIFO inventory amounts.

Answer 1

Answer(1):  Accounting Changes- These are the changes in accounting principles, assumptions, methods of depreciation and inventory valuation.

Types of accounting changes- There are mainly three types of accounting changes:

1. Change in accounting principles- When company changes Generally accepted accounting principles to other principles and assumptions.
2. Change in methods- When company changes inventory valuation methods and depreciation methods.
3. Change in reporting entity- When company changes its financial reporting or it converts from one type of organization to some other type of organization.

Major reasons why companies change accounting methods- These are as following:

1. When company wants to increase its profitability and cash flow,
2. When Financial accounting standard board provides guidelines to change the accounting methods.

Answer(2) Accounting Errors- Accounting error is the discrepancy in accounting practice and reporting. Accounting errors are result of negligence and these are non fraudulent.

Reporting of accounting errors- Company should try to find out the discrepancy in amounts and errors, after that errors should be rectified with the help of accounting rules. Company should offset the similar amount that is short or in excess. After that financial statement of each period should be adjusted.

After correcting the accounting errors, these should be disclosed and financial transactions should be disclosed that were be affected by errors.

Answer(4): Difference between counterbalancing and noncounterbalancing errors- Some points are as following-

1. Counterbalancing errors are the errors that cancel or offset other errors while noncounterbalancing errors are the errors that are not offset automatically in the coming accounting period.
2. Example of counterbalancing errors is "Not recording prepaid revenue/ expense. Example of noncounterbalancing errors is "failure to capitalize the depreciable assets".
3. Counterbalancing errors are self corrected over or after two years while noncounterbalancing errors take more than two years.