What must occur if a company changes an accounting practice?

What must occur if a company changes an accounting practice?

• A. It must be recorded in a separate book
• B. Only the management needs to be aware
• C. The change must be noted and explained
• D. It is not required to document the change

Answer: (C)

When a company changes an accounting practice, it is essential that the change is noted and explained to maintain transparency and consistency in financial reporting. This requirement is rooted in the principles of Generally Accepted Accounting Principles (GAAP), which emphasize the importance of providing clear and comprehensive information to stakeholders. Noting and explaining a change in accounting practice allows users of the financial statements, such as investors and creditors, to understand how the change may affect the company's financial position and results of operations. By detailing the nature of the change and the rationale behind it, the company ensures that users can make informed decisions based on the financial information provided. This practice also helps in maintaining comparability over periods, which is crucial for analysis and evaluation by external parties. In contrast, simply recording the change in a separate book would not adequately inform stakeholders, and limiting awareness to management undermines the transparency required in financial reporting. Additionally, failing to document or explain the change would violate GAAP principles, as it would obscure important information from investors and other users of the financial statements. Therefore, the requirement to note and explain the change is vital for adhering to GAAP and promoting accountability.

When a company changes an accounting practice, it is essential that the change is noted and explained to maintain transparency and consistency in financial reporting. This requirement is rooted in the principles of Generally Accepted Accounting Principles (GAAP), which emphasize the importance of providing clear and comprehensive information to stakeholders. Noting and explaining a change in accounting practice allows users of the financial statements, such as investors and creditors, to understand how the change may affect the company's financial position and results of operations.

By detailing the nature of the change and the rationale behind it, the company ensures that users can make informed decisions based on the financial information provided. This practice also helps in maintaining comparability over periods, which is crucial for analysis and evaluation by external parties.

In contrast, simply recording the change in a separate book would not adequately inform stakeholders, and limiting awareness to management undermines the transparency required in financial reporting. Additionally, failing to document or explain the change would violate GAAP principles, as it would obscure important information from investors and other users of the financial statements. Therefore, the requirement to note and explain the change is vital for adhering to GAAP and promoting accountability.