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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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When a change in accounting principle is made during the year, the cumulative effect on retained earnings is determined:

  1. a. during the year using the weighted average method
  2. b. as of the date of the change
  3. c. as of the beginning of the year in which the change is made
  4. d. as of the end of the year in which the change is made

To determine

Find the correct option, the option which explains the time period at which the cumulative effect of retained earnings is determined, if a change in accounting principle is considered.

Explanation

Accounting changes: When a company requires to sacrifice the consistent accounting methods and procedures, to enhance the usefulness and relevance of the accounting information, those changes are referred to as accounting changes. Such inevitable accounting changes decrease the comparability and consistency of accounting information. The reasons for accounting changes could be new methods introduced by FASB (Financial Accounting Standards Board), changes in accounting principles, and changes in accounting estimates. The following are the three types of accounting changes:

  • Change in an accounting principle
  • Change in an accounting estimate
  • Change in a reporting entity

Justification for correct answer: 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...

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