Question

• Accountants very often are required to make estimates, and very often those estimates prove incorrect. In what period(s) is the effect of a change in an accounting estimate reported?
  
• The correction of a material error discovered in a year subsequent to the year the error was made is considered a prior period adjustment. Briefly describe the accounting treatment for prior period adjustments.
  
• Define earnings per share (EPS). For which income statement items do you think EPS must be disclosed? Why?

Answer 1

Answer:

Requirement 1

A change in accounting estimate is accounted for in the year of the alteration and in succeeding periods; prior years' financial statements are not paraphrased. A disclosure note should validate that the variation is desirable and should define the consequence of a change on any financial statement line items and per share amounts affected for all periods stated.

Requirement 2

Prior period adjustments are accounted for by reiterating prior years' financial statements when those statements are obtainable again for assessment commitments. The beginning of period retained earnings is amplified or reduced on the statement of shareholders' equity (or the statement of retained earnings) as of the beginning of the initial period presented.

Requirement 3

Earnings per share (EPS) is the sum of income realized through a period for each share of common stock outstanding. If there are diverse constituents of income reported below continuing operations, their effects on earnings per share must be revealed. If a period comprises discontinued operations, EPS data must be stated independently for income from continuing operations, discontinued operations, and net income.