accounting changes three situations change in accounting principles change in accounting estimates correction of accounting errors

three methods of presentation

change in accounting principles retrospective method - voluntary if specified by ASU prospective method - to LIFO cumulative effect method - if allowed by ASU change in accounting estimates prospective method correction of accounting errors (from prior periods) retrospective method

retrospective change in accounting principle specified for certain accounting changes for example a change from LIFO to ??? correction of prior period errors prior period adjustments calculate the cumulative effect as of 1/1/xx of the first year presented in the financial statements

Income State State of RE

required entry it is 1/28/15 (actually anytime during 2015) 2015 G.L. is still open 2014 G.L. is closed Inventory 23.50 Retained Earnings 23.50 we can’t adjust 2014’s G.L. it is closed so we have to make our AJE in 2015’s G.L.

cumulative effect change in accounting principle if it were permitted by ASC in our example - from LIFO cost to FIFO

Income State State of RE fold here

required entry it is 1/28/15 (actually anytime during 2015) 2015 G.L. is still open 2014 G.L. is closed Inventory 23.50 Cumulative effect ... 23.50

prospective change in accounting principle in our example from ave cost to LIFO too difficult to calculate the cumulative effect, you would have to go back to day 1 changes in accounting estimates change estimated life of depreciable asset change estimates in bad debt expense

Income State State of RE Balance Sheet fold here

no entry required you take the balances in the G.L. on 12/31/14 and use those for your beginning balances in 2015

correction of a prior period error are you up the creek without

single year financial statements these are the financial statements that we mailed out last year using LIFO but we made a mistake in our physical inventory ... we only counted 8 units and we all know they really had 10

with a Prior Period Adjustment these are the financial statements that we will mail out this year showing the correction with a Prior Period Adjustment

required entry it is 1/01/12 (actually sometime in 2012) 2012 G.L. is still open 2011 G.L. is closed Inventory 9.00 Retained Earnings 9.00

two-year comparative financial statements these are the financial statements that we mailed out last year using LIFO we made a mistake in our physical inventory ... we only counted 8 units and we all know they really had 10

these are the financial statements that we will mail out this year showing the correction

required entry it is 1/01/13 (actually sometime in 2013) Inventory .00 2013 G.L. is still open 2012 G.L. is closed Inventory .00 Retained Earnings .00 we can’t adjust 2012’s G.L. it is closed so we have to make our AJE in 2013’s G.L. as of 12/31/2012 Inventory is OK

no bull TAD