Question

A change in an accounting estimate is: Multiple Choice Reflected in current and future years' financial statements, not in prior statements. Not allowed under current accounting rules. Considered an error in the financial statements. Reflected in past financial statements. Reflected in future financial statements and also requires modification of past statements.

Answer 1

Answer:

Reflected in current and future years' financial statements, not in prior statements.

Explanation:

A change in accounting estimate can be defined as a necessary adjustment of the book value or carrying value (cost of an asset in the balance sheet minus its depreciation) of an asset, which usually arises as a result of the assessment of its current status, expected benefits in a future date and obligations with respect to the assets.

Hence, a change in an accounting estimate is reflected in current and future years' financial statements, not in prior statements. This simply means that, a change in accounting estimate should be accounted for prospectively by the accountants; this is in accordance with the International Accounting Standards Board (IASB), International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles (GAAP).

Also, note that a change in an accounting estimate is not necessarily a correction of errors, rather it arises as a result of change in information or a new development regarding the asset or liability. Examples of informations that are being changed in an accounting estimate are; depreciation, warranty liability, bad-debt allowance etc.

Additionally, a change in an accounting estimate does not require the accountant or financial expert stating the previous financial statement.