Changes in Accounting Principles and Changes in Accounting Estimates\" Please re

Question

Changes in Accounting Principles and Changes in Accounting Estimates" Please respond to the following: From the e-Activity, discuss the accounting principles that the identified company changed, and explain the major reasons why the company changed accounting principles. Give your opinion on whether you believe the change in accounting principles was to benefit the corporation or investors and creditors. Provide a rationale for your response. Imagine you are the senior accountant at your organization, and management is not sure of the difference between a change in accounting estimate and a change in accounting principle. 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. Give your opinion on why a company should avoid reporting changes in accounting principles and changes in accounting estimates. Provide a rationale for your response.

Explanation / Answer

1) DIFFERENCE BETWEEN CHANGE IN ACCOUNTING PRINCIPLE AND CHANGE IN ACCOUNTING ESTIMATES

Change in Accounting Principle-

Accounting principles are general guidelines that govern the methods of recording and reporting financial information.

When an entity chooses to adopt a different method from the one it currently employs, it is required to record and report that change in its financial statements. A good example of this is a change in inventory valuation;

for example, a company might switch from a FIFO method to a specific-identification method, Change in depreciation method.

Change in Accounting Estimate

Accountants use estimates in their reports when it is impossible or impractical to provide exact numbers. When these estimates prove to be incorrect, or new information allows for a more accurate estimation, the entity should record the improved estimate in a change in accounting estimate.

Examples of commonly changed estimates include bad-debt allowance, warranty liability and the service life of an asset.

2) IMPACT OF CHANGE IN ACCOUNTING PRINCIPLES AND CHANGE IN ACCOUNTING ESTIMATES ON COMPANY'S FINANCIAL STATEMENT-

ACCOUNTING CHANGES REQUIRE FULL DISCLOSURE IN THE FOOTNOTES OF THE FINANCIAL STATEMENTS TO DESCRIBE THE JUSTIFICATION AND FINANCIAL EFFECT OF THE CHANGE. THIS ALLOW S READERS OF THE STATEMENTS TO ANALYZE THE CHANGES APPROPRIATELY.

A COMPANY GENERALLY NEEDS TO RESTATE PAST STATEMENTS TO REFLECT A CHANGE IN ACCONTING PRINCIPLE.

A CHANGE IN ACCOUNTING ESTIMATE DOES NOT NEED TO BE RESTATED.

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