TRANSLATION FROM THE FUNCTIONAL CURRENCY TO THE REPORTING CURRENCY USING THE CURRENT RATE METHOD:
it includes,
ITEMS:
all balance sheet items and other than stockholders equity.
stockholders equity except for changes in retained earnings.
all revenue and expenses.
TRANSLATION AT:
current exchange rate
historical exchange rate
weighted average method or historical exchange rate [ if practicable]
IMPACT OF INFLATION ON FINANCIAL STATEMENT AND FINANCIAL RATIO:
accounting changes:
changes in accounting principles:
it is the change from one US GAAP principle to another US GAAP principle.
example:
changes from LIFO and FIFO
changes from the sum of the year depreciation method to the straight-line method.
changes in accounting estimate:
example:
such as changes in estimated warranty cost changes in the allowance for credit loss on account receivable etc.
changes in reporting entity:
example:
it is can occur if there is a change in the subsidies of companies that are included in the consideration.
accounting of errors in previously issued financial statements:
example:
such as mathematical mistakes in applying a principle and other errors.
3 methods of accounting for changes or corrections
retrospective applications:
used for changes in accounting principles and changes in reporting entities.
financial statement of all periods presented is adjusted for the effect of the changes in each specific period.
restatement:
used for correcting errors
financial statement of all periods presented is adjusted for the effect of the corrections in each specific period.
Prospective adjustment:
used for changes in estimations
no changes were made to the prior financial statement, but adjusted in the current period and going forward.
EARNING QUALITY:
it is related to the source of the company's profit.
increased earnings due to increased sales and improved cost control are of a higher quality than artificial profit created by inflation of inventory or other asset prices.
DETERMINANTS OF EARNING QUALITY INCLUDE :
the companies business environment
example:
in an inflationary period, a company will inventory profit, currency fluctuation, political conditions, social conditions, and regulations also affect the company's business environment.
SELECTION AND APPLICATION OF ACCOUNTING PRINCIPLES:
accounting profit depends upon assumption and estimation etc.