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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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What distinguishes a change in an accounting principle from a change in an estimate? What is the proper accounting if the two changes cannot be distinguished from each other?

To determine

Explain the difference between a change in accounting principle and a change in an accounting estimate.

Explanation

Change in an accounting principle: This change occurs when a company decides to change from an accounting principle to another, like change from LIFO to FIFO. A change in accounting principle effects the values that impact the figures of previous and current years, thus, impairs the consistency and comparability. Hence, the changes in accounting principle should be adjusted with a retrospective effect to impact the previous financial statements, to increase the comparability and the consistency of the values between the previous and current accounting periods.

Change in an accounting estimate: This change occurs when a company decides to change the estimates based on the additional information or future events...

To determine

Explain the accounting treatment if a change in accounting principle and a change in an accounting estimate are inseparable.

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