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Trystdy12
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Joined: 25 Aug 2009
Location: United States
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Posts: 69

Posted: 04 Sep 2009 at 14:45 \| IP Logged

This is a monster topic for me. I think I understand the theory but I am having a hard time applying it on the questions.

1) Changes are done retrospectively

2) If comparative FS are provided then restate prior year FS

3) if no comparative FS are provided then restate retained earnings only. The cumulative effect of the change should be shown in the retained earmnings of the earliest period presented as an adjsutment to begining retained earnings.

Exception to the rule are

a) Change in method of inventory from any menthod to LIFO - done prospectively

b) Change is method of depreciation is both change in estimate and principle so its treated prospectively too.

I know the above but still i am unable to correctly answer the questions related to the topic. Is there anyone else struggling with this topic or has a better idea of how to reslove this?

Please help!!!!

bryris
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Joined: 07 Dec 2008
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Posts: 624

Posted: 05 Sep 2009 at 00:14 \| IP Logged

You have to think of what the goal is and from an operations viewpoint.

A change in estimate is merely a prospective change. Say you are depreciating a machine over 5 years, but it turns out it'll go for 8. Just correct that moving forward. This is a regular part of business.

With a change in principle, the goal is to provide comparison with periods that occurred before the change. So for comparative purposes only, you'll restate the prior periods so that the basis for comparison is uniform. You only need to go back to the earliest year shown.

Post up a particular question you are struggling with and lets see if we can find whats snagging you.

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AG_CPA
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Joined: 19 Jun 2009
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Posted: 17 Sep 2009 at 01:22 \| IP Logged

Here is an example on Cumulative Effect:

G inc has used FIFO method of inventory valuation since
it began operation in 1987. G decided to change to
Weighted-Avg method for determining inventory costs at
the beginning of 1990. The following schedule shows year-
end inventory balances under FIFO and Weighted Avg
methods:
Year : FIFO : WA
1987 : 45,000: 54,000
1988 : 78,000: 71,000
1989 : 83,000: 78,000

What amount, before income taxes, should be reported in
the 1990 retained earnings statement as the cumulative
effect of the change in accounting principle?

The answer says 5,000 decrease, however, applying rules
am getting 3,000 decrease. The answer explanation
provided is confusing.

Am calculating the cumulative effect as the impact on
income statement due to inc/dec in inventory levels
starting 1987 i.e. +9000-7000-5000 = Decrease in
cumulative income impacting statement of RE of 3,000.

Appreciate if someone could explain/clarify..

Thanks in advance.

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lovethepirk
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Joined: 10 Jul 2009
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Posts: 295

Posted: 17 Sep 2009 at 02:02 \| IP Logged

Quote:

+9,000 -7,000, -5000 = Decrease in
cumulative income impacting statement of RE of 5,000.

That equation adds up to -3,000 not -5000.

Or am I misunderstanding you?

AG_CPA
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Joined: 19 Jun 2009
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Posted: 17 Sep 2009 at 03:12 \| IP Logged

lovethepirk - I got the little mixed up with 3k/5k in the
question, I corrected the post above. The correct answer is
5K but when I compute cumulative effect for last 3 years, I
get 3k. Not sure why they only correcting just 1989 but not
cumulative of previous 3 years.

thanks

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