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CHAPTER 20
QUESTIONS

1. Comparability enables users to relate accounting information to a benchmark or standard. The benchmark may be in the form of another firm’s financial statements or financial data of the same firm but for some other time period. An accounting change could make it difficult to compare data from one period to another or from one firm to another, thus detracting from comparability. For example, if a company switched from straight-line depreciation to double-declining-balance depreciation in 2015, depreciation expense for 2015 could not be compared with prior years’ depreciation expense without knowing the effects of the change in accounting for depreciation.

Consistency means that a company applies the same methods to similar transactions and events from period to period. Therefore, accounting changes, especially changes in methods used, would detract from the informational characteristic of consistency.

2. a. Change in accounting estimate. As a result of experience or the availability of new information, a company may revise estimates used in the measurement of income.

b. Change in accounting principle. A change in accounting principle or meth-od may be required due to changing economic conditions or as a result of a new pronouncement issued by an authoritative standard-setting body.

3. Alternative procedures suggested for reporting accounting changes are as follows:

a. Restate the financial statements presented for prior periods to reflect the effect of the change. Adjust the beginning Retained Earnings balance of the earliest period reported for the cumulative effect of the change in all preceding years.

b. Make no adjustment to statements presented for prior periods. Report the cumulative effect of the change in the current year as a direct entry to Retained Earnings.

c. Same as (b) except report the cumulative

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