ACC 305 Intermediate Accounting III

Accounting
Tutor: None Selected Time limit: 1 Day

Briefly discuss the difference between a change in accounting estimate and a change in accounting principle, and outline the impact the changes will have on the company’s financial statements.

May 24th, 2015

Accounting estimates include the estimated salvage value and the estimated useful life of depreciable assets, estimated percentage of bad debts expense, estimated percentage of units to be repaired or replaced during a warranty period, and routine estimates of monthly expenses for utilities and other expenses. When a change is needed to one of these estimates, the change can affect the current and future periods only. Previous periods are not restated for changes in estimates. (Corrections of errors require a restatement of a prior period amount.)

An accounting principle is a general guideline to follow when recording and reporting financial transactions. There is a change in accounting principle when:

  • There are two or more generally accepted accounting principles that apply to a particular situation, and you shift to the other principle; or
  • When the accounting principle that former applied to the situation is no longer generally accepted; or
  • You change the method of applying the principle.

A direct effect of a change in accounting principle is a recognized change in an asset or liability that is required in order to effect the change in principle. For example, if you change from theFIFO to the specific identification method of inventory valuation, the resulting change in the recorded inventory cost is a direct effect of a change in accounting principle.

An indirect effect of a change in accounting principle is a change in an entity's current or future cash flows from a change in accounting principles that you are applying retrospectively. Retrospective application means that you are applying the change in principle to the financial results of previous periods, as if the new principle had always been in use.


May 24th, 2015

Studypool's Notebank makes it easy to buy and sell old notes, study guides, reviews, etc.
Click to visit
The Notebank
...
May 24th, 2015
...
May 24th, 2015
May 24th, 2017
check_circle
Mark as Final Answer
check_circle
Unmark as Final Answer
check_circle
Final Answer

Secure Information

Content will be erased after question is completed.

check_circle
Final Answer