b) Explain the difference between a change in accounting policy and a change in estimate. Discuss the accounting

Question

b) Explain the difference between a change in accounting policy and a change in estimate. Discuss the accounting requirements. Provide an example of each. (4 marks) c) Net income is an important and probably the most commonly referred to indicator of the performance of a company. Yet net income is at best an imperfect indicator of performance. Explain why a user of financial statements must be very careful about how he or she interprets net income. Support your answer by providing examples from your knowledge of accounting and the course. (4 marks)

Help In Homework · Accepted Answer

Answer to b): Change in Accounting Policy Change in Estimate Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. A change in accounting estimate is an adjustment of the carrying amount of an asset or liability, or related expense, resulting from reassessing the expected future benefits and obligations associated with that asset or liability. Accounting Policies are followed consistently by the organization, the company may change its policy. The Change in Estimates is done for Depreciation on PPE & Provisions for warranty. Example: Change of Method of Inventory Valuation from LIFO to FIFO Example: Change in Useful life of the assets. Answer to c): Net Income Net income is very much important for analysing the financial performance of the company but it may give wrong picture to the investor or may not give actual operating results of the company. Example: The Company may have non cash items more due to which there is less profit is showing, also the company may have non operating expenses more or non operating income more due to whixh actual results of the company is not traceable by seeing only Net income.

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b) Explain the difference between a change in accounting policy and a change in estimate

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Answer to b):

Change in Accounting Policy	Change in Estimate
Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.	A change in accounting estimate is an adjustment of the carrying amount of an asset or liability, or related expense, resulting from reassessing the expected future benefits and obligations associated with that asset or liability.
Accounting Policies are followed consistently by the organization, the company may change its policy.	The Change in Estimates is done for Depreciation on PPE & Provisions for warranty.
Example: Change of Method of Inventory Valuation from LIFO to FIFO	Example: Change in Useful life of the assets.

Answer to c):

Net Income
Net income is very much important for analysing the financial performance of the company but it may give wrong picture to the investor or may not give actual operating results of the company.
Example: The Company may have non cash items more due to which there is less profit is showing, also the company may have non operating expenses more or non operating income more due to whixh actual results of the company is not traceable by seeing only Net income.