Change in Accounting Principle: Retrospective Method. CPA exam

How do you apply the retrospective method for a change in accounting principle? Professor Farhat explains the retrospective method used to account for a change in accounting principle, which preserves comparability across periods. This financial accounting tutorial covers restating prior years presented, computing the cumulative effect on beginning retained earnings when prior years are not shown, the required disclosures, and a full journal entry example switching from completed contract to percentage of completion. Ideal for CPA candidates studying FAR and college students in an intermediate accounting course. Try it free at farhatlectures.com — interactive exercises, lectures, simulations, cases, multiple choice, and AI tools for CPA, CMA, EA and students. Video Timeline & Key Concepts: 0:00 — Introduction and the retrospective method 2:35 — Retrospective adjustment of prior periods presented 3:30 — Handling periods that are not presented 6:17 — Case study: completed contract to percentage of completion 8:16 — Computing the net-of-tax cumulative effect 9:33 — The journal entry to record the change 11:50 — Required disclosures Frequently Asked Questions: What is the retrospective method? The retrospective method accounts for a change in accounting principle by restating the financial statements of all prior periods presented as if the new principle had always been used, which keeps the periods comparable. How do you handle prior years that are not presented? When affected prior years are not shown, the company computes the cumulative effect of the change on all those years and adjusts the beginning balance of retained earnings in the earliest period presented. How is the cumulative effect calculated? You compare net income under the old and new principles for each prior period, sum the differences, and apply the tax effect to arrive at the net-of-tax cumulative adjustment to retained earnings. What journal entry records a change in principle? The entry adjusts the affected asset or liability for the pretax cumulative difference, records the related deferred tax effect, and adjusts retained earnings for the net-of-tax amount at the beginning of the year of change. What disclosures are required for a change in accounting principle? The company must disclose the nature of and reason for the change, the method of applying it, and the effect of the change on income and retained earnings for the periods presented. #CPAexam #CMAexam #enrolledagentexam #accountingcourses #collegecourses #courses #FAR #changeinaccountingprinciple #retrospective #intermediateaccounting #accountingchanges #ProfessorFarhat