Exam 6: Accounting Policies, Estimates, and Errors

An entity need not apply a change retrospectively if it is impracticable to determine either the period-specific effects or the cumulative effect of the change. -Explain what impracticable means.

Discovery of misstatements due to fraud should be corrected like an error.

Accounting policy elections must be followed consistently from year to year.

Corrections of prior period errors are

The 'impracticability' criterion for exemption from changing comparative information is a high hurdle.

A change in accounting policy involves a change from one ac?counting policy accepted under IFRS to another.

The impracticability criterion for exemption from changing comparative information is

Retrospective adjustment means:

Which of the following is an example of a change in accounting policy?

Milano Entity (ME) based its 20X7 estimate for doubtful accounts on 2.5% of the average accounts receivable balance. Because of strong demand for ME's products, sales on account were much higher in the last quarter of 20X7 than they were in the previous three quarters. Management determined after reviewing year-end adjusting entries had been made that a more realistic estimate of collectible accounts should be based on the year-end balance in accounts receivable. The average accounts receivable balance for 20X6 was 600,000 euros and the year-end balance was 710,000 euros. The average accounts receivable balance for 20X7 was 750,000 euros and the year-end balance was 980,000 euros. ME prepares comparative financial statements. Provide any necessary adjusting entries.

Errors should be corrected

The consistency principle dictates that once an estimate is made, it cannot be changed from year to year.

Prospective adjustment means:

Explain retrospective application of a new accounting principle.

An entity need not apply a change retrospectively if it is impracticable to determine either the period-specific effects or the cumulative effect of the change. -Give two general examples of how an entity would know that it is impracticable to make a change.

Which of the following statements is true concerning accounting estimates?

The application of a new accounting policy to account for transactions, other events or conditions that did not occur previously or that were not material is an example of a change in accounting policies.

Changing economic environment may be a reason why an entity would change accounting policies.

When an entity applies a change in accounting policy retrospectively, financial statement amounts disclosed for each comparative prior period should be presented as if the new accounting policy had always been applied.

Because accounting is precise, accounting estimates are unusual and infrequent.