Deck 6: Accounting Policies, Estimates, and Errors

Question 1

Retrospective adjustment means:

A) Changes must be made in accounting for an item from the time of the change going forward.
B) Changes must be made in accounting for an item from the time the original accounting entry was made.
C) Presenting other comparative amounts disclosed for each prior period as if the new accounting policy had always been applied.
D) Adjustments to accounting for an item should be retroactively applied to the beginning of the accounting period.

Answer 1

Presenting other comparative amounts disclosed for each prior period as if the new accounting policy had always been applied.

Question 2

Which of the following is an example of a change in accounting policy?

A) A vote of the board of directors to change the method for depreciating a building.
B) A revised IFRS that allows companies to reflect the fair value of its buildings on the financial statements.
C) The controller discovers extends the useful life of computers from three years to four years.
D) Management's choice to follow US GAAP rather than IFRS for PPE.

Answer 2

A revised IFRS that allows companies to reflect the fair value of its buildings on the financial statements.

Question 3

Which of the following statements is true concerning accounting estimates?

A) Accounting estimates are a fundamental and necessary aspect of many accounting measurements.
B) In many situations, making good estimates requires a company to hire third-party estimates who have expertise in the area being measured.
C) In order to maintain accounting independence, estimates should made by personnel outside of the accounting function.
D) Accounting estimates are inherently difficult to make.

Answer 3

Accounting estimates are a fundamental and necessary aspect of many accounting measurements.

Question 4

Changes in estimates are:

A) Recognized retrospectively.
B) Deferred until the end of the useful life of an asset.
C) Discouraged because changes indicate that the original measurement was incorrect
D) Recognized prospectively.

Question 5

Prospective adjustment means:

A) Changes must be made in accounting for an item from the time of the change going forward.
B) Changes must be made in accounting for an item from the time the original accounting entry was made.
C) Presenting other comparative amounts disclosed for each prior period as if the new accounting policy had always been applied.
D) Adjustments to accounting for an item should be retroactively applied to the beginning of the accounting period.

Question 6

Changes in estimates are recognized prospectively by

A) deferring gains and recognizing any losses associated with the change.
B) recording the effect of the change in other comprehensive income.
C) reporting the effect of the change in a profit or loss.
D) debiting or crediting the change in estimates reserve.

Question 7

Errors in accounting entries result from all of the following except

A) good internal control
B) lack of due care
C) misinterpretation of facts
D) oversights and inexperience.

Question 8

Errors should be corrected

A) only when fraud is involved.
B) in the first set of financial statements issued after their discovery.
C) by a person who did not make the error.
D) only after it has been determined that the financial statements as a whole are materially misstated.

Question 9

Corrections of prior period errors are

A) accounted for by retrospective adjustment.
B) deferred until the end of the useful life of an asset.
C) unnecessary because errors made that affect income reverse themselves in the next period.
D) accounted for by prospective adjustment.

Question 10

The impracticability criterion for exemption from changing comparative information is

A) not allowed under IFRS.
B) used frequently when making a correction is difficult.
C) required when entities consolidate financial reporting.
D) used when retrospective application or retrospective restatement is determined to be impracticable

Question 11

Accounting policy elections must be followed consistently from year to year.

Question 12

The consistency principle dictates that once an estimate is made, it cannot be changed from year to year.

Question 13

Because accounting is precise, accounting estimates are unusual and infrequent.

Question 14

The 'impracticability' criterion for exemption from changing comparative information is a high hurdle.

Question 15

Discovery of misstatements due to fraud should be corrected like an error.

Question 16

A change in accounting policy involves a change from one ac?counting policy accepted under IFRS to another.

Question 17

The application of a new accounting policy to account for transactions, other events or conditions that did not occur previously or that were not material is an example of a change in accounting policies.

Question 18

Changing economic environment may be a reason why an entity would change accounting policies.

Question 19

When an entity applies a change in accounting policy retrospectively, financial statement amounts disclosed for each comparative prior period should be presented as if the new accounting policy had always been applied.

Question 20

When retrospective application is deemed impracticable, the reporting entity must disclose the reason for not restating the comparative amounts.

Question 21

Explain retrospective application of a new accounting principle.

Question 22

If no specific IFRS applies to a transaction, other event or condition, what should an entity do?

Question 23

Explain the two conditions under which an entity can change accounting policy.

Question 24

An entity need not apply a change retrospectively if it is impracticable to determine either the period-specific effects or the cumulative effect of the change.
-Explain what impracticable means.

Question 25

An entity need not apply a change retrospectively if it is impracticable to determine either the period-specific effects or the cumulative effect of the change.
-Give two general examples of how an entity would know that it is impracticable to make a change.

Question 26

Milano Entity (ME) based its 20X7 estimate for doubtful accounts on 2.5% of the average accounts receivable balance. Because of strong demand for ME's products, sales on account were much higher in the last quarter of 20X7 than they were in the previous three quarters. Management determined after reviewing year-end adjusting entries had been made that a more realistic estimate of collectible accounts should be based on the year-end balance in accounts receivable.
The average accounts receivable balance for 20X6 was 600,000 euros and the year-end balance was 710,000 euros. The average accounts receivable balance for 20X7 was 750,000 euros and the year-end balance was 980,000 euros. ME prepares comparative financial statements.
Provide any necessary adjusting entries.