Fin ACCT 2 CH20

Retrospective approach of accounting changes

adjust previous financial statements. In earliest period chosen to reflect the change, record the cumulative effect in the beginning balance of retained earnings.

modified retrospective approach

only begin adjusting this period, and record cumulative prior effects in beginning balance of retained earnings.

prospective approach

apply account changes in current period. Previous effects not accounted for; no change in beginning retained earnings.

always use this for accountingestimate revisions

Steps to correct an accounting error

1. Je to correct account balances

2. retrospectively restate financial statements

3. in statement of shareholders equity, record RE change

4. disclosure note

prior period adjustment

list on statement of SE equity/RE. Prior period adjustment (___) instead of just changing the beg balance

Cash flow statement basic set up

Net income

Adjustments for noncash income statement items:

• depreciation expense

• amortization expense

• loss on sale of equipment

• gain on sale of land ()

Adjustments for changes in operating assets and liabilities:

• increase in AR()

• decrease in inventory

• increase in prepaid insurance ()

• increase in payable

Net cash flows from Investing activities:

• purchase of St investments ()

• Purchase of euipment ()

• Sale

Cash flows from Financing Activities:

• repayment of notes payable ()

• issuance of common stock

• payment of cash dividends ()