Q-during y2, D copr. made the followng accounting changes:

Method used in Y1   method used in y2   after-tax effect

SYD depreciation      SL depreciation        $30,000

weighted-average      FIFO         &n bsp;         &n bsp;  $98,000

What amount should be classified in y2 as prior-period adjustment.

a 98000

b 0

c 128,000

d 30,000

Correct answer 0. Explanation - A change from one gaap to another, such as from weighted-average to fifo is retrospectively applied if it is not impracticable to do so.

So, I"m thinking - Change in depreciation method is prospective. The change in inventory valuation is retrospective. But how in earth do I know of that the retrospective amount is "not impracticable" to calculate?? thanks a lot.

The term "Prior period adjustment" is given for error corrections in the prior year or when  a non GAAP method is changed to GAAP.

But the two cases given above do not follow under this category.

It is just a case of "Change in accounting principles"

So there is nothing to be classified as prior period adjustment.

That said, I also have the doubt as to how the treatment is different -between a change in accounting principle and prior period adjustment. The text says adjust beginning retained earnings for the earliest year given and restate financial statements if presented.

Please share your thoughts

sanju06, my understanding is that when you change from one inventory valuation to another inventory valuation, it's a change in the method of applying a GAAP; therefore, a change in accounting principle. And it requires a retrospective application.

Retrospective application requires carrying amount of assets, liabilities and RE at the beginning of the first period reported to be adjusted for cumulative effect.

The thing is error correction - requires a prior period adjustment by restating the prior-period statements presented. And, the restatement requires the same adjustments as retrospective application of a change in principle.

Therefore, I"m not sure what is the main difference between error correction and change in accounting principle. Please we need some help here:(