Alsubaie Faisal Ali M Set 3 Iacase 12 After The Julie Compan

Alsubaie Faisal Ali M Set 3iacase 12 After The Julie Company Iss

After the Julie Company issued its previous years’ financial statements, it noticed that it incorrectly calculated depreciation expense and, thus, disclosed this fact as a prior period adjustment in its current years’ financial statements. This difference also did not affect any cash balances, since Julie maintained an operating loss for both periods. However, Julie did not issue comparative financial statements in the current year. Julie now wonders how to disclose this prior period adjustment in its current year’s Statement of Cash Flows.

In addressing this issue, it is essential to understand the implications of prior period adjustments on financial reporting and the specific requirements for presenting information within the Statement of Cash Flows. According to accounting standards such as ASC 250-10 (U.S. GAAP) and IAS 8 (IFRS), prior period adjustments related to errors should be applied retrospectively and disclosed appropriately. Since Julie did not issue comparative financial statements in the current year, the adjustment must be presented differently than in prior periods where comparative figures are provided.

Under U.S. GAAP, when a correction of an error or a prior period adjustment is made, the effect is usually reflected by restating opening balances of retained earnings for the earliest period presented. However, if comparative financial statements are not presented, the correction is reflected directly in the current period’s financial statements. In the context of the Statement of Cash Flows, which explains cash movements during the period, the prior period adjustment may not have a direct impact on cash flows. Nevertheless, disclosure of the nature and amount of the correction is essential for transparency.

The appropriate approach for Julie Company would be to disclose the prior period adjustment as a supplement within the notes to the financial statements, explicitly detailing the nature of the error, the correction made, and how it impacts net income or retained earnings. When preparing the Statement of Cash Flows, it is advisable to include a reconciliation or a note explaining that the correction of depreciation expense did not result in cash flow changes, as it was an accounting error rather than a cash transaction. Additionally, if the adjustment affects net income, the company should adjust the net income figure accordingly for the current reporting period, ensuring that the cash flow statement reflects the actual cash generated or used during the period, exclusive of such non-cash adjustments.

For transparency and completeness, the company could also include a supplementary schedule reconciling net income as originally reported with the adjusted net income, clarifying that the depreciation correction was a prior period adjustment with no effect on cash. Moreover, since no comparative figures are provided in the current period, the focus should be on clear disclosures in the notes rather than on restating prior periods.

Conclusion

In summary, Julie Company should disclose the prior period depreciation adjustment in the notes to the financial statements, explaining the nature of the error and its correction. The actual statement of cash flows should reflect cash activities only, with a possible supplementary note that clarifies that the adjustment did not involve cash transactions or impact cash balances. This approach aligns with accounting standards that prioritize transparency and provide users with a clear understanding of the company's financial position and performance without misrepresenting cash flows.

References

• Financial Accounting Standards Board (FASB). (2020). ASC 250-10: Accounting for corrections and adjustments.
• International Accounting Standards Board (IASB). (2019). IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors.
• Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial Accounting Theory and Analysis: Text and Cases. Wiley.
• Wild, J., Shaw, K., & Chiapetta, B. (2017). Financial & Managerial Accounting. McGraw-Hill Education.
• Hendriksen, E. S., & Van Breda, M. (2018). Theory and Practice of Accounting. Routledge.
• Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate Accounting. Wiley.
• CPA Canada. (2021). Guide to Financial Reporting and Disclosure.
• American Institute of CPAs (AICPA). (2018). Audit and Accounting Guide: Construction Contractors.
• International Financial Reporting Standards (IFRS). (2020). IFRS Accounting Standards.
• Bhattacharya, H., & Thakral, K. (2022). Contemporary Accounting and Corporate Governance. Springer.