Change in Accounting Principles, Change in Estimates, and Errors Correction Subm

Question

Change in Accounting Principles, Change in Estimates, and Errors Correction

Submit the responses to the following questions in a two to three page MS Word document. Make sure your responses are well written, formatted per CSU-Global guidelines for APA Style and have proper citations.

1. Your company has recently decided to change its method of depreciating long-term assets to be consistent with major competitors. Your company has always used the straight-line method while most other companies in the industry use a declining-balance method. Preliminary computations indicate that changing this accounting principle will reduce Earnings per Share by about 10% in the current year. Naturally, those to whom you report would like to know if there is any way to lessen the impact of this change.

You know that other factors in computing depreciation expense are the estimates of useful life and salvage value. You reason that if the estimated useful life of long-term assets is reassessed with minor modifications to the estimated lives, then switching the depreciation method will not decrease net income this period.

1. Can the plan of reassessing the estimated lives of long-term assets achieve the desired result of allowing the company to change depreciation accounting methods to a declining-balance method without reducing net income this period?

2. Will the company have a higher cash inflow as a result of either the change in principle or the change in estimate?

3. Should the level of a company’s income determine the accounting methods that it uses and the accounting estimates that it makes? Why or why not?

2. Most accounting-related errors are detected and corrected in the current period. Of those that go undetected, some will fix themselves over two periods, while other errors may remain undetected for years.

What is difference between those errors that will counterbalance and those that carry over from period to period? Identify these differences considering such issues as whether the accounts involved are balance sheet and/ or income statement accounts, whether they are current and/ or noncurrent accounts, and whether they involve revenue or expense accounts. Finally, provide a systematic method for analyzing an error to determine if it counterbalances or if a journal entry is necessary to correct the books.

Your well-written paper must be 2-3 pages, in addition to title and reference pages. The paper should be formatted according to the APA Requirements. Any supporting calculations should be inserted in a table in your Word document. Do not submit two separate documents, as only one document can be accepted.

Explanation / Answer

Answer 1. Yes. Written down value is calculated basis Usefull life of the asset. If the useful life of an asset is increased, then the written down deprication per year will change (Decrease) accordingly and the same can be adjusted to reach the desired results.

Answer 2. Depriciation is a non cash expense and do not affect the cash flows at all. Though it is adjusted with net profit while calculating the cash flow statement. The same is reversed when increase or decrease in assets is adjusted.

Answer 3. No. Accounting principles and standards are designed so as to give the correct picture of the company's profitability and financial state. It does not hold any criteria basis the company's turnover or profitability.

To represent the true and fair facts about company financials to the concerned stakeholders, company is adviced and should follow the accounting standards and priciples while dfrafting the financial statements and accounting.

Answer 4. Errors that are counter balanced will have no effect on the debit and credit side of the financial statements as these errors set off each other affect on statments. However the errors that are carried forward from previous years will have under / over stated debit balance or credit balance and the financial statements will not tie to have the same result. This is an Audit issue and during audit, accounts bearing such errors can go unaudited and will result in unaudited financial statements.

Such errors needs to be corrected in order to have financial statements audited (Which is an important requirment for all the companies). For the same purpose, audit entries are required to be passed to show the correct balance.

To do this, it is important to have the error identified, the accounts that are not reconciling, also need to understant the issues behind the error, and adjustment etries are required to be passed basis the nature of the account (Asset A/c, Revenue A/c or Expense A/c)

Note:- I dont have the APA format you have mentioned in the question. Either provide the same and I will put my answer in the same format.

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