Chapter 22 Accounting Changes and Error Analysis

CHAPTER 22

Accounting Changes and Error Analysis

CHAPTER REVIEW

1. Chapter 22 discusses the different procedures used to report accounting changes and error corrections. The use of estimates in accounting as well as the uncertainty that surrounds many of the events accountants attempt to measure may make adjustments to the financial reporting process necessary. The accurate reporting of these adjustments in a manner that facilitates analysis and understanding of financial statements is the focus of this chapter.

Types of Accounting Changes

2. (S.O. 1) The FASB has standardized the manner in which accounting changes are reported. The three types of accounting changes are as follows:

a. Change in Accounting Principle. A change from one generally accepted accounting principle to another one.

b. Change in Accounting Estimate. A change that occurs as the result of new information or additional experience. An example is a change in the estimate of the useful lives of depreciable assets.

c. Change in Reporting Entity. A change from reporting as one type of entity to another type of entity, for example, changing specific subsidiaries comprising the group of companies for which consolidated financial statements are prepared.

*Note: All asterisked (*) items relate to material contained in the Appendix to the chapter.

Errors in Financial Statements

3. Errors result from mathematical mistakes, mistakes in applying accounting principles, or oversight or misuse of facts that existed when preparing financial statements.

Changes in Accounting Principle

4. (S.O. 2) A change in accounting principle is not considered to result from the adoption of a new principle in recognition of events that have occurred for the first time or that were previously immaterial. For example, implementing a credit sales policy when one had not previously existed is not considered a change in accounting principle. Also, a change from an accounting...