Question

5. Changes in estimates are not carried back to adjust prior years. Explain how changes in estimates are accounted for in the current year?

6. A change in accounting principle requires that the cumulative effect of the change for prior periods be shown as an adjustment to beginning retained earnings of the earliest period presented. Explain what this means?

7. A required disclosure in the income statement when reporting the disposal of a component of the business includes reporting earnings per share from continuing operations, discontinued operations, and net income on the face of the income statement. Provide an example of how this required disclosure would be presented (on the face of the income statement).

8. Carrot Corporation made a very large arithmetical error in the preparation of its year-end financial statements by improper placement of a decimal point in the calculation of depreciation. The error caused the net income to be reported at almost double the proper amount. Correction of the error when discovered in the next year should be treated as a prior period adjustment. Explain what Carrot Corporation needs to do (how do they go about reporting a prior period adjustment)

Answer 1

Accounting estimates are approximate values assigned by a company's management to different accounting variables.

Whenever company changes such estimates, it is required to reflect the changes only in current and future periods, but not in past periods.

Accounting elements are either definite, such as invoice price of fixed asset, cost of freight, cost of insurance etc or variables like useful life of the asset, potential warranty expenses etc,

Under IFRS, IAS8 provides guidance on how to make accounting estimates and how to account for changes in such estimates over a period of time. It requires companies to reflect changes in estimates prospectively.