1 accounting changes that’s me. 2 three issues 3 change in accounting principles change in accounting estimates prior period adjustments.

1

accounting changes

that’s me

2

three issues

3

change in accounting principles

change in accounting estimates

prior period adjustments

4

change in accounting principlesretrospective method - voluntary

if specified by ASU

prospective method - to LIFO

cumulative effect method -

change in accounting estimatesprospective method

prior period adjustmentsretrospective method

5

C.E.

Pro

Retro

change in actg principle if allowed to LIFO if specifieddepreciationvoluntary

change in estimate n/a yes n/a

prior period adjust n/a n/a yes

6

three methods of reporting

7

I’m going to teach the three reporting methods

8

C.E.

Pro

Retro

change in actg principle if allowed to LIFO if specifieddepreciationvoluntary

change in estimate n/a yes n/a

prior period adjust n/a n/a yes

9

cumulative effect (current year)change in accounting principles – if allowed

prospectivechange in accounting principles - to LIFO

changes in accounting estimates

retrospective change in accounting principles - if specified by ASU

correction of prior period errors or prior period adjustments

10

selling total

Sales units price sales

year 01 19 $ 8.00 152.00year 02 30 9.00 270.00year 03 32 10.00 320.00

81 $ 742.00

annual

Inventory units cost extend purchases

12/31/10 5 $ 4.00 20.00

4/16/11 12 4.50 54.0011/08/11 12 5.00 60.00 $ 114.00

2/11/12 3 5.50 16.505/20/12 8 6.00 48.0010/15/12 20 6.50 130.00 $ 194.50

3/13/13 12 7.00 84.007/20/13 7 7.50 52.509/17/13 11 8.00 88.00 $ 224.50

90 $ 553.00

11

“ave cost” financial statements

12

Income Statement and Statement of Retained EarningsAverage Cost Inc.

for the years ending Dec. 31,

2013 2012 2011

Sales $ 320.00 $ 270.00 $ 152.00

Inventory @ 1/1/xx 11 64.58 10 46.21 5 20.00Purchases 30 224.50 31 194.50 24 114.00Available 41 289.08 41 240.71 29 134.00Inventory @ 12/31/xx 9 63.46 11 64.58 10 46.21Cost of Goods Sold -ave 32 225.62 30 176.13 19 87.79

Gross Profit / Net Income $ 94.38 $ 93.87 $ 64.21

Retained earnings @ 1/1/xx 158.08 64.21 0.00Retained earnings @ 12/31/xx $ 252.46 $ 158.08 $ 64.21

Balance Sheetas of Dec. 31,

Cash $ 189.00 $ 93.50 $ 18.00Inventory @ ave cost 63.46 64.58 46.21

Owners' equity $ 252.46 $ 158.08 $ 64.21

13

FIFO financial statements

14

Income Statement and Statement of Retained EarningsFIFO Inc.

for the years ending Dec. 31,

2013 2012 2011

Sales $ 320.00 $ 270.00 $ 152.00

Inventory @ 1/1/xx 11 71.50 10 50.00 5 20.00Purchases 30 224.50 31 194.50 24 114.00Available 41 296.00 41 244.50 29 134.00Inventory @ 12/31/xx 9 72.00 11 71.50 10 50.00Cost of Goods Sold -FIFO 32 224.00 30 173.00 19 84.00

Gross Profit / Net Income $ 96.00 $ 97.00 $ 68.00

Retained earnings @ 1/1/xx 165.00 68.00 0.00Retained earnings @ 12/31/xx $ 261.00 $ 165.00 $ 68.00

Balance Sheetas of Dec. 31,

Cash $ 189.00 $ 93.50 $ 18.00Inventory @ FIFO cost 72.00 71.50 50.00

Owners' equity $ 261.00 $ 165.00 $ 68.00

15

LIFO financial statements

16

Income Statement and Statement of Retained EarningsLIFO Inc.

for the years ending Dec. 31,

2013 2012 2011

Sales $ 320.00 $ 270.00 $ 152.00

Inventory @ 1/1/xx 11 48.00 10 42.50 5 20.00Purchases 30 224.50 31 194.50 24 114.00Available 41 272.50 41 237.00 29 134.00Inventory @ 12/31/xx 9 38.00 11 48.00 10 42.50Cost of Goods Sold -LIFO 32 234.50 30 189.00 19 91.50

Gross Profit / Net Income $ 85.50 $ 81.00 $ 60.50

Retained earnings @ 1/1/xx 141.50 60.50 0.00Retained earnings @ 12/31/xx $ 227.00 $ 141.50 $ 60.50

Balance Sheetas of Dec. 31,

Cash $ 189.00 $ 93.50 $ 18.00Inventory @ LIFO cost 38.00 48.00 42.50

Owners' equity $ 227.00 $ 141.50 $ 60.50

17

don’t even think about it

18

cumulative effect

change in accounting principle

if it were permitted by ASC

• in our example - from average cost to FIFO

19

these are the financial statements that we mailed out last year using .... average cost

20

Income Statement and Statement of Retained EarningsAverage Cost Inc.

for the years ending Dec. 31,

2012 2011

Sales $ 270.00 $ 152.00

Inventory @ 1/1/xx 10 46.21 5 20.00Purchases 31 194.50 24 114.00Available 41 240.71 29 134.00Inventory @ 12/31/xx 11 64.58 10 46.21Cost of Goods Sold -ave 30 176.13 19 87.79

Gross Profit / Net Income $ 93.87 $ 64.21

Retained earnings @ 1/1/xx 64.21 0.00Retained earnings @ 12/31/xx $ 158.08 $ 64.21

Balance Sheetas of Dec. 31,

Cash $ 93.50 $ 18.00Inventory @ ave cost 64.58 46.21

Owners' equity $ 158.08 $ 64.21

21

we can calculate what inventory would have been on 12/31/12

as if we had been using FIFO since 1/01/11

Sales units

year 01 19 8.00 152.00year 02 30 9.00 270.00year 03 32 10.00 320.00

81 742.00

Inventory12/31/10 5 4.00 20.00

4/16/11 12 4.50 54.0011/08/11 12 5.00 60.00 114.00

2/11/12 3 5.50 16.505/20/12 8 6.00 48.0010/15/12 20 6.50 130.00 194.50 11 6.50 71.50

3/13/13 12 7.00 84.007/20/13 7 7.50 52.509/17/13 11 8.00 88.00 224.50

90 553.00

22

this year last year

FIFO ave cost ave cost ave cost

2013 2012 2012 2011

Sales $ 320.00 $ 270.00 $ 270.00 $ 152.00

Inventory @ 1/1/xx 11 71.50 10 46.21 10 46.21 5 20.00Purchases 30 224.50 31 194.50 31 194.50 24 114.00Available 41 296.00 41 240.71 41 240.71 29 134.00Inventory @ 12/31/xx 9 72.00 11 64.58 11 64.58 10 46.21Cost of Goods Sold 32 224.00 30 176.13 30 176.13 19 87.79

Gross Profit 96.00 93.87 $ 93.87 $ 64.21Cumulative effect of 6.92

Net income $ 102.92 $ 93.87

Retained earnings @ 1/1/xx 158.08 64.21 64.21 0.00Retained earnings @ 12/31/xx $ 261.00 $ 158.08 $ 158.08 $ 64.21

Cash $ 189.00 $ 93.50 $ 93.50 $ 18.00Inventory 72.00 $ 64.58 64.58 46.21

Owners' equity $ 261.00 $ 158.08 $ 158.08 $ 64.21

fold here

23

these are the financial statements that we will mail out this year

after the change in accounting principle

from “ave cost” to FIFO

24

Income Statement and Statement of Retained Earningsfrom Ave. Cost to FIFO Inc.

for the years ending Dec. 31,

2012 2011

Sales $ 320.00 $ 270.00

Inventory @ 1/1/xx 11 71.50 10 46.21Purchases 30 224.50 31 194.50Available 41 296.00 41 240.71Inventory @ 12/31/xx 9 72.00 11 64.58Cost of Goods Sold 32 224.00 30 176.13

Gross Profit 96.00 93.87Cumulative effect of 6.92

Net income $ 102.92 $ 93.87

Retained earnings @ 1/1/xx 158.08 64.21Retained earnings @ 12/31/xx $ 261.00 $ 158.08

Balance Sheetas Dec. 31,

Cash $ 189.00 $ 93.50Inventory 72.00 64.58

Owners' equity $ 261.00 $ 158.08

25

required entry

it is 1/01/13 (actually anytime during 2013)• 2013 G.L. is still open• 2012 G.L. is closed

Inventory 6.92

Cumulative effect ... 6.92

26

work has to be better than this

27

prospective

change in accounting principle

• in our example from ave cost to LIFO• too difficult to calculate the cumulative effect,

you would have to go back to day 1

changes in accounting estimates• change estimated life of depreciable asset• change estimates in bad debt expense

28

these are the financial statements that we mailed out last year using ... average cost

29

Income Statement and Statement of Retained EarningsAverage Cost Inc.

for the years ending Dec. 31,

2012 2011

Sales $ 270.00 $ 152.00

Inventory @ 1/1/xx 10 46.21 5 20.00Purchases 31 194.50 24 114.00Available 41 240.71 29 134.00Inventory @ 12/31/xx 11 64.58 10 46.21Cost of Goods Sold -ave 30 176.13 19 87.79

Gross Profit / Net Income $ 93.87 $ 64.21

Retained earnings @ 1/1/xx 64.21 0.00Retained earnings @ 12/31/xx $ 158.08 $ 64.21

Balance Sheetas of Dec. 31,

Cash $ 93.50 $ 18.00Inventory @ ave cost 64.58 46.21

Owners' equity $ 158.08 $ 64.21

30

in order to calculate what inventory would have been on 12/31/12 if we had been using LIFO

since 1/01/11we would have to back to 1/01/11Sales units

year 01 19 8.00 152.00year 02 30 9.00 270.00year 03 32 10.00 320.00

81 742.00

Inventory12/31/10 5 4.00 20.00 5 4.00 20.00 5 4.00 20.00

4/16/11 12 4.50 54.00 5 4.50 22.50 5 4.50 22.5011/08/11 12 5.00 60.00

2/11/12 3 5.50 16.50 1 5.50 5.505/20/12 8 6.00 48.0010/15/12 20 6.50 130.00

3/13/137/20/139/17/13

31

this year last year

LIFO ave cost ave cost ave cost

2013 2012 2012 2011

Sales $ 320.00 $ 270.00 $ 270.00 $ 152.00

Inventory @ 1/1/xx 11 64.58 10 46.21 10 46.21 5 20.00Purchases 30 224.50 31 194.50 31 194.50 24 114.00Available 41 289.08 41 240.71 41 240.71 29 134.00Inventory @ 12/31/xx 9 52.84 11 64.58 11 64.58 10 46.21Cost of Goods Sold 32 236.24 30 176.13 30 176.13 19 87.79

Gross Profit / Net Income $ 83.76 $ 93.87 $ 93.87 $ 64.21

Retained earnings @ 1/1/xx 158.08 64.21 64.21 0.00Retained earnings @ 12/31/xx $ 241.84 $ 158.08 $ 158.08 $ 64.21

Cash $ 189.00 $ 93.50 $ 93.50 $ 18.00Inventory 52.84 $ 64.58 64.58 46.21

Owners' equity $ 241.84 $ 158.08 $ 158.08 $ 64.21

fold here

32

these are the financial statements that we will mail out this year

after the change in accounting principle

from “ave cost” to LIFO

33

Income Statement and Statement of Retained Earningsfrom Ave. Cost to LIFO Inc.

for the years ending Dec. 31,

2013 2012

Sales $ 320.00 $ 270.00

Inventory @ 1/1/xx 11 64.58 10 46.21Purchases 30 224.50 31 194.50Available 41 289.08 41 240.71Inventory @ 12/31/xx 9 52.84 11 64.58Cost of Goods Sold 32 236.24 30 176.13

Gross Profit / Net Income $ 83.76 $ 93.87

Retained earnings @ 1/1/xx 158.08 64.21Retained earnings @ 12/31/xx $ 241.84 $ 158.08

Balance Sheetas of Dec. 31,

Cash $ 189.00 $ 93.50Inventory 52.84 $ 64.58

Owners' equity $ 241.84 $ 158.08

34

no entry required

you take the balances in the G.L. on 12/31/12 and use those for your beginning balances in 2013

35

retrospective

change in accounting principle• specified for certain accounting changes• for example a change from LIFO to ???

correction of prior period errors• prior period adjustments

calculate the cumulative effect as of 1/1/xx of the first year presented in the financial statements

36

LIFO financial statements

37

Income Statement and Statement of Retained EarningsLIFO Inc.

for the years ending Dec. 31,

2013 2012 2011

Sales $ 320.00 $ 270.00 $ 152.00

Inventory @ 1/1/xx 11 48.00 10 42.50 5 20.00Purchases 30 224.50 31 194.50 24 114.00Available 41 272.50 41 237.00 29 134.00Inventory @ 12/31/xx 9 38.00 11 48.00 10 42.50Cost of Goods Sold -LIFO 32 234.50 30 189.00 19 91.50

Gross Profit / Net Income $ 85.50 $ 81.00 $ 60.50

Retained earnings @ 1/1/xx 141.50 60.50 0.00Retained earnings @ 12/31/xx $ 227.00 $ 141.50 $ 60.50

Balance Sheetas of Dec. 31,

Cash $ 189.00 $ 93.50 $ 18.00Inventory @ LIFO cost 38.00 48.00 42.50

Owners' equity $ 227.00 $ 141.50 $ 60.50

38

these are the financial statements that we mailed out last year using ... LIFO

39

Income Statement and Statement of Retained EarningsLIFO Inc.

for the years ending Dec. 31,

2012 2011

Sales $ 270.00 $ 152.00

Inventory @ 1/1/xx 10 42.50 5 20.00Purchases 31 194.50 24 114.00Available 41 237.00 29 134.00Inventory @ 12/31/xx 11 48.00 10 42.50Cost of Goods Sold -ave 30 189.00 19 91.50

Gross Profit / Net Income $ 81.00 $ 60.50

Retained earnings @ 1/1/xx 60.50 0.00Retained earnings @ 12/31/xx $ 141.50 $ 60.50

Balance Sheetas of Dec. 31,

Cash $ 93.50 $ 18.00Inventory @ ave cost 48.00 42.50

Owners' equity $ 141.50 $ 60.50

40

we can calculate what inventory would have been on 12/31/11 and 12/31/12 if we had been

using FIFO since 1/01/11Sales units

year 01 19 8.00 152.00year 02 30 9.00 270.00year 03 32 10.00 320.00

81 742.00

Inventory12/31/00 5 4.00 20.00

4/16/01 12 4.50 54.0011/08/01 12 5.00 60.00 10 5.00 50.00

2/11/02 3 5.50 16.505/20/02 8 6.00 48.0010/15/02 20 6.50 130.00 11 6.50 71.50

3/13/03 12 7.00 84.007/20/03 7 7.50 52.509/17/03 11 8.00 88.00

90 553.00

41

this year last year

FIFO FIFO LIFO LIFO

2013 2012 2012 2011

Sales $ 320.00 $ 270.00 $ 270.00 $ 152.00

Inventory @ 1/1/xx 11 71.50 10 50.00 10 42.50 5 20.00Purchases 30 224.50 31 194.50 31 194.50 24 114.00Available 41 296.00 41 244.50 41 237.00 29 134.00Inventory @ 12/31/xx 9 72.00 11 71.50 11 48.00 10 42.50Cost of Goods Sold 32 224.00 30 173.00 30 189.00 19 91.50

Gross Profit / Net Income $ 96.00 $ 97.00 $ 81.00 $ 60.50

Retained earnings @ 1/1/xx $ 141.50 $ 60.50 $ 60.50 $ 0.00Retrospective change 23.50 7.50Adjusted Retained Earnings $ 165.00 $ 68.00Net income 96.00 97.00 81.00 60.50Retained earnings @ 12/31/xx $ 261.00 $ 165.00 $ 141.50 $ 60.50

Cash $ 189.00 $ 93.50 $ 93.50 $ 18.00Inventory 72.00 71.50 48.00 42.50

Owners' equity $ 261.00 $ 165.00 $ 141.50 $ 60.50

42

these are the financial statements that we will mail out this year

after the change in accounting principle

from LIFO to FIFO

43

Income Statement and Statement of Retained Earningsfrom LIFO to FIFO Inc.

for the years ending Dec. 31,

2003 2002

Sales $ 320.00 $ 270.00

Inventory @ 1/1/xx 11 71.50 10 50.00Purchases 30 224.50 31 194.50Available 41 296.00 41 244.50Inventory @ 12/31/xx 9 72.00 11 71.50Cost of Goods Sold 32 224.00 30 173.00

Gross Profit $ 96.00 $ 97.00

Retained earnings @ 1/1/xx $ 141.50 $ 60.50Retrospective change 23.50 7.50Adjusted Retained Earnings $ 165.00 $ 68.00Net income 96.00 97.00Retained earnings @ 12/31/xx $ 261.00 $ 165.00

Balance Sheetas of Dec. 31,

Cash $ 189.00 $ 93.50Inventory 72.00 71.50

Owners' equity $ 261.00 $ 165.00

44

required entry

it is 1/01/13 (actually anytime during 2013)• 2013 G.L. is still open• 2012 G.L. is closed

Inventory 23.50

Retained Earnings 23.50

we can’t adjust 2012’s G.L. it is closed so we have to make our AJE in 2013’s G.L.

45

correction of a prior period errorare you up the creek without

46

single year financial statements

these are the financial statements that we mailed out last year using LIFO

but we made a mistake in our physical inventory ... we only counted 8 units

and we all know they really had 10

47

Income Statement and Statement of Retained EarningsLIFO with error, INC.

for the years ending Dec. 31,

2011

Sales $ 152.00

Inventory @ 1/1/xx 5 20.00Purchases 24 114.00Available 29 134.00Inventory @ 12/31/xx 8 33.50Cost of Goods Sold -ave 19 100.50

Gross Profit / Net Income $ 51.50

Retained earnings @ 1/1/xx 0.00Retained earnings @ 12/31/xx $ 51.50

Balance Sheetas of Dec. 31,

Cash $ 18.00Inventory @ ave cost 33.50

Owners' equity $ 51.50

48

LIFO LIFO

2012 2011

Sales $ 270.00 $ 152.00

Inventory @ 1/1/xx 10 42.50 5 20.00Purchases 31 194.50 24 114.00Available 41 237.00 29 134.00Inventory @ 12/31/xx 11 48.00 8 33.50Cost of Goods Sold 30 189.00 19 100.50

Gross Profit $ 81.00 $ 51.50

Retained earnings @ 1/1/xx $ 51.50 $ 0.00Retro Active correction 9.00Adjusted Retained earnings $ 60.50Net income 81.00 51.50Retained earnings @ 12/31/xx $ 141.50 $ 51.50

Cash $ 93.50 $ 18.00Inventory 48.00 33.50

Owners' equity $ 141.50 $ 51.50

49

these are the financial statements that we will mail out this year showing the correction

with a Prior Period Adjustment

50

Income Statement & Statement of Retained EarningsLIFO with error, Inc.

for the years ending Dec. 31,

2012

Sales $ 270.00

Inventory @ 1/1/xx 10 42.50Purchases 31 194.50Available 41 237.00Inventory @ 12/31/xx 11 48.00Cost of Goods Sold -LIFO 30 189.00

Gross Profit / Net Income $ 81.00

Retained earnings @ 1/1/xx $ 51.50Retro Active correction 9.00Adjusted Retained earnings $ 60.50Net income 81.00Retained earnings @ 12/31/xx $ 141.50

Balance Sheetas of Dec. 31,

Cash $ 93.50Inventory @ LIFO cost 48.00

Owners' equity $ 141.50

51

required entry

it is 1/01/12 (actually sometime in 2012)• 2012 G.L. is still open• 2011 G.L. is closed

Inventory 9.00

Retained Earnings 9.00

52

two-year comparative financial statements

these are the financial statements that we mailed out last year using LIFO

we made a mistake in our physical inventory ... we only counted 8 units

and we all know they really had 10

53

Income Statement and Statement of Retained EarningsLIFO with error, Inc.

for the years ending Dec. 31,

2012 2011

Sales $ 270.00 $ 152.00

Inventory @ 1/1/xx 8 33.50 5 20.00Purchases 31 194.50 24 114.00Available 39 228.00 29 134.00Inventory @ 12/31/xx 11 48.00 8 33.50Cost of Goods Sold -ave 30 180.00 19 100.50

Gross Profit / Net Income $ 90.00 $ 51.50

Retained earnings @ 1/1/xx 51.50 0.00Retained earnings @ 12/31/xx $ 141.50 $ 51.50

Balance Sheetas of Dec. 31,

Cash $ 93.50 $ 18.00Inventory @ ave cost 48.00 33.50

Owners' equity $ 141.50 $ 51.50

54

this year last year

LIFO LIFO LIFO LIFO

2013 2012 2012 2011

Sales $ 320.00 $ 270.00 $ 270.00 $ 152.00

Inventory @ 1/1/xx 11 48.00 10 42.50 8 33.50 5 20.00Purchases 30 224.50 31 194.50 31 194.50 24 114.00Available 41 272.50 41 237.00 39 228.00 29 134.00Inventory @ 12/31/xx 9 38.00 11 48.00 11 48.00 8 33.50Cost of Goods Sold 32 234.50 30 189.00 30 180.00 19 100.50

Gross Profit $ 85.50 $ 81.00 $ 90.00 $ 51.50

Retained earnings @ 1/1/xx $ 141.50 $ 51.50 $ 51.50 $ 0.00Retrospective correction 0.00 9.00Adjusted Retained Earnings $ 141.50 $ 60.50Net income 85.50 81.00 90.00 51.50Retained earnings @ 12/31/xx $ 227.00 $ 141.50 $ 141.50 $ 51.50

Cash $ 189.00 $ 93.50 $ 93.50 $ 18.00Inventory 38.00 48.00 48.00 33.50

Owners' equity $ 227.00 $ 141.50 $ 141.50 $ 51.50

55

these are the financial statements that we will mail out this year showing the correction

56

Income Statement and Statement of Retained EarningsLIFO with error, Inc.

for the years ending Dec. 31,

2013 2012

Sales $ 320.00 $ 270.00

Inventory @ 1/1/xx 11 48.00 10 42.50Purchases 30 224.50 31 194.50Available 41 272.50 41 237.00Inventory @ 12/31/xx 9 38.00 11 48.00Cost of Goods Sold -LIFO 32 234.50 30 189.00

Gross Profit / Net Income $ 85.50 $ 81.00

Retained earnings @ 1/1/xx $ 141.50 $ 51.50Retrospective correction 9.00Adjusted Retained earnings $ 141.50 $ 60.50Net income 85.50 81.00Retained earnings @ 12/31/xx $ 227.00 $ 141.50

Balance Sheetas of Dec. 31,

Cash $ 189.00 $ 93.50Inventory @ LIFO cost 38.00 48.00

Owners' equity $ 227.00 $ 141.50

57

required entryit is 1/01/13 (actually sometime in 2013)

• 2013 G.L. is still open• 2012 G.L. is closed

Inventory .00

Retained Earnings .00

we can’t adjust 2012’s G.L. it is closed so we have to make our AJE in 2013’s G.L. as of 12/31/2012 Inventory is OK

58

no bull

TAD