Identify all false statements about changes in accounting principles and estimates. 1. Investors likely prefer the retrospective approach as it is best for comparability across reporting periods. 2. Companies likely prefer the prospective approach as it is the least costly to apply. 3. Voluntary changes in accounting principle such as inventory-method change and depreciation- method change require the retrospective approach. 4. Change in estimated useful life of equipment should be accounted for prospectively. 5. Good justifications from investors' viewpoint for a voluntary change in accounting principle is t the change increases earnings and is less costly to implement. 6. "Taking earnings bath" is more likely during a good year or the year of management change.
1. Investors likely prefer the retrospective approach as it is best for comparability across reporting periods. Because they want to know the actual position of the entity. Therefore the 1st statement is true.
2. Companies likely prefer the prospective approach because it is the least costly to apply as compared to the retrospective approach. Therefore the 2nd statement is also true.
3. Voluntary changes in accounting principles should be applied retrospectively such as inventory-method change and depreciation method change require the retrospective approach. Hence the 3rd statement is also true.
4. Change in estimated useful life of equipment should be accounted for prospectively. Because the change in the estimated useful life of equipment shall be accounted as a change in accounting estimates. Therefore the 4th statement is also true.
5. Good justifications from investors' viewpoint for a voluntary change in accounting principle is the change increases earnings and is less costly to implement. Because the retrospective change requires high cost and it will decrease the profit. Therefore, the 5th statement is false.
6. "Taking earnings bath" is more likely during a bad year not in the good year. Therefore, the 6th statement is false.
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