The following are three independent, unrelated sets of facts relating to accounting changes.Situation 1: Sanford Company is in the process of having its first audit. The company has used the cash basis of accounting for revenue recognition. Sanford president, B. J. Jimenez, is willing to change to the accrual method of revenue recognition.Situation 2: Hopkins Co. decides in January 2021 to change from FIFO to weighted-average pricing for its inventories.Situation 3: Marshall Co. determined that the depreciable lives of its fixed assets are too long at present to fairly match the cost of the fixed assets with the revenue produced. The company decided at the beginning of the current year to reduce the depreciable lives of all of its existing fixed assets by 5 years.InstructionsFor each of the situations described, provide the information indicated below.a.    Type of accounting change.b.    Manner of reporting the change under current generally accepted accounting principles, including a discussion where applicable of how amounts are computed.c.    Effect of the change on the balance sheet and income statement.

Question
Asked Jan 24, 2020
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The following are three independent, unrelated sets of facts relating to accounting changes.

Situation 1: Sanford Company is in the process of having its first audit. The company has used the cash basis of accounting for revenue recognition. Sanford president, B. J. Jimenez, is willing to change to the accrual method of revenue recognition.

Situation 2: Hopkins Co. decides in January 2021 to change from FIFO to weighted-average pricing for its inventories.

Situation 3: Marshall Co. determined that the depreciable lives of its fixed assets are too long at present to fairly match the cost of the fixed assets with the revenue produced. The company decided at the beginning of the current year to reduce the depreciable lives of all of its existing fixed assets by 5 years.

Instructions

For each of the situations described, provide the information indicated below.

a.    Type of accounting change.

b.    Manner of reporting the change under current generally accepted accounting principles, including a discussion where applicable of how amounts are computed.

c.    Effect of the change on the balance sheet and income statement.

 

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Expert Answer

Step 1

Accounting error: Accounting errors can be defined as omission of the fundamental accounting principles in the financial statements.

Accounting principle: Accounting principles are the standard set of rules and guidelines which every organization has to comply, with respect to the preparation of financial statements.

Step 2

Determine the type of accounting change and the manner of reporting the change under the current generally accepted accounting principles. Explain the effect of the change on the balance sheet and income statement for the given situations.

Situation 1:

(a) Changing to the correct principle from the wrong accounting principle is a change or correction of error.

(b) Restatement of net income, components of net income, retained or repossessed earnings, and any other affected balances for all periods should be made in the comprehensive statement. Required adjustments should be made and notified even if it is a single period statement. A description of the change and its effect should be disclosed in the period of the change and repetition of the mistake should be avoided.

(c) Restatement of the beginning or opening balance of retained earnings in the balance sheet. Correct approach should be followed for the current year and for the previous year financial statements.

Step 3

Situation 2:

(a) As defined in GAAP the change or alteration in method of inventory pricing and the match of accounting principle.

(b) Changes in accounting principle always have a retrospective application. The cumulative or consolidated effect of the new method on the financial statements at the beginning of ...

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