Question 1

Presenting consolidated financial statements this year when statements of individual companies were presented last year is
A) a correction of an error.
B) an accounting change that should be reported prospectively.
C) an accounting change that should be reported by restating the financial statements of all prior periods presented.
D) not an accounting change.

Accepted Answer

Presenting consolidated financial statements when previously only individual company statements were presented is considered an accounting change that requires the restatement of all prior periods presented to ensure comparability across the financial statements.

Question 2

The estimated life of a building that has been depreciated for 30 years of an originally estimated life of 50 years has been revised to a remaining life of 10 years. Based on this information, the accountant should
A) continue to depreciate the building over the original 50-year life.
B) depreciate the remaining book value over the remaining life of the asset.
C) adjust accumulated depreciation to its appropriate balance, through net income, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years.
D) adjust accumulated depreciation to its appropriate balance through retained earnings, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years.

Accepted Answer

Since the estimated remaining life of the building has been revised to 10 years, the accountant should depreciate the remaining book value over the remaining 10 years of the asset's life. Option A would result in over-depreciation, while options C and D require adjusting accumulated depreciation, which may not be appropriate or practical. Therefore, option B is the best choice.

Question 3

When a company decides to switch from the double-declining balance method to the straight-line method, this change should be handled as a
A) change in accounting principle.
B) change in accounting estimate.
C) prior period adjustment.
D) correction of an error.

Accepted Answer

Switching from the double-declining balance method to the straight-line method is considered a change in accounting estimate. This is because the method of depreciation affects the timing and amount of depreciation expense, which is an estimate of the asset's useful life and salvage value.

Question 4

Which of the following is not accounted for a change in accounting principle?
A) A change from LIFO to FIFO for inventory valuation
B) A change to a different method of depreciation for plant assets
C) A change from full-cost to successful efforts in the extractive industry
D) A change from the completed-contract to the percentage-of-completion method

Accepted Answer

A change to a different method of depreciation for plant assets is considered a change in accounting estimate, not a change in accounting principle. Changes in accounting principles involve a switch from one generally accepted accounting principle to another, while changes in estimates are adjustments based on new information or new experiences.

Question 5

An example of a correction of an error in previously issued financial statements is a change
A) from the FIFO method of inventory valuation to the LIFO method.
B) in the service life of plant assets, based on changes in the economic environment.
C) from the cash basis of accounting to the accrual basis of accounting.
D) in the tax assessment related to a prior period.

Accepted Answer

The answer of An example of a correction of an...

Question 6

Which of the following disclosures is required for a change from sum-of-the-years-digits to straight-line depreciation method?
A) The cumulative effect on prior years, net of tax, in the current retained earnings statement
B) Restatement of prior years' income statements
C) Recomputation of current and future years' depreciation
D) All of these are required.

Accepted Answer

A change in depreciation method is accounted for prospectively. This means that the depreciation expense for the current and future years is recalculated according to the new method, but prior years' financial statements are not restated.

Question 7

Stone Company changed its method of pricing inventories from FIFO to LIFO. What type of accounting change does this represent?
A) A change in accounting estimate for which the financial statements for prior periods included for comparative purposes should be presented as previously reported.
B) A change in accounting principle for which the financial statements for prior periods included for comparative purposes should be presented as previously reported.
C) A change in accounting estimate for which the financial statements for prior periods included for comparative purposes should be restated.
D) A change in accounting principle for which the financial statements for prior periods included for comparative purposes should be restated.

Accepted Answer

This is a change in accounting principle, and prior period financial statements should be presented as previously reported, not restated.

Question 8

Which of the following is not a retrospective-type accounting change?
A) Completed-contract method to the percentage-of-completion method for long-term construction contracts
B) LIFO method to the FIFO method for inventory valuation
C) Sum-of-the-years'-digits method to the straight-line method
D) "Full cost" method to another method in the extractive industry

Accepted Answer

The answer of Which of the following is not a...

Question 9

Which of the following statements is correct?
A) Changes in accounting principle are always handled in the current or prospective period.
B) Prior statements should be restated for changes in accounting estimates.
C) A change from expensing certain costs to capitalizing these costs due to a change in the period benefited, should be handled as a change in accounting estimate.
D) Correction of an error related to a prior period should be considered as an adjustment to current year net income.

Accepted Answer

Changes in accounting estimates are handled prospectively, while changes in accounting principles are usually handled retrospectively or prospectively depending on the circumstances. Prior statements should not be restated for changes in accounting estimates but must be restated for changes in accounting principles. Correction of an error related to a prior period should be considered as a restatement of prior period financial statements and not an adjustment to current year net income. Therefore, option C is the correct statement.

Question 10

In the process of conversion from the equity method to the fair value method, the earnings or losses that the investor previously recognized under the equity method should:
A) be ignored.
B) be subtracted from the carrying value of the securities.
C) remain as a part of the carrying amount of the investment.
D) be shown in the income statement.

Accepted Answer

Under the equity method, the investor's share of the investee's earnings or losses is recognized in the carrying amount of the investment. When converting to the fair value method, these previously recognized earnings or losses remain as part of the carrying amount of the investment, as they have already been reflected in the investor's equity in the investee.

Question 11

Which of the following is (are) the proper time period(s) to record the effects of a change in accounting estimate?
A) Current period and prospectively
B) Current period and retrospectively
C) Retrospectively only
D) Current period only

Accepted Answer

When there is a change in accounting estimate, it should be recorded in the current period and prospectively going forward. This means that the effect of the change should be reflected in the financial statements of the current period, as well as any future periods that the change will impact. Retrospective application of the change is not required or appropriate in this case. Therefore, only option A is the correct answer.

Question 12

Accounting changes are often made and the monetary impact is reflected in the financial statements of a company even though, in theory, this may be a violation of the accounting concept of
A) materiality.
B) consistency.
C) conservatism.
D) objectivity.

Accepted Answer

The accounting concept of consistency states that a company should use the same accounting methods and principles from one period to another. However, if changes must be made, they should be disclosed and explained. Therefore, accounting changes can be made as long as they are disclosed and explained in the financial statements. Thus, making accounting changes is not a violation of materiality, conservatism, or objectivity but is a violation of consistency concept.

Question 13

Which type of accounting change should always be accounted for in current and future periods?
A) Change in accounting principle
B) Change in reporting entity
C) Change in accounting estimate
D) Correction of an error

Accepted Answer

Changes in accounting estimates are accounted for in the current and future periods. This is because they reflect new information or developments and do not relate to prior periods. Examples include changes in the useful lives of depreciable assets or changes in the expected obligations under a warranty.

Question 14

Counterbalancing errors do not include
A) errors that correct themselves in two years.
B) errors that correct themselves in three years.
C) an understatement of purchases.
D) an overstatement of unearned revenue.

Accepted Answer

The answer of Counterbalancing errors do not include
A) errors that...

Question 15

Which of the following describes a change in reporting entity?
A) A company acquires a subsidiary that is to be accounted for as a purchase.
B) A manufacturing company expands its market from regional to nationwide.
C) A company divests itself of a European branch sales office.
D) Changing the companies included in combined financial statements.

Accepted Answer

A change in reporting entity occurs when there is a change in the companies included in the financial statements. This is commonly seen in combined financial statements when a subsidiary or affiliate is added or removed. Choices A, B, and C describe other types of events that may require accounting adjustments but do not involve a change in reporting entity.

Question 16

Which of the following disclosures is required for a change from LIFO to FIFO?
A) The cumulative effect on prior years, net of tax, in the current retained earnings statement
B) The justification for the change
C) Restated prior year income statements
D) All of these are required.

Accepted Answer

All of these are required for a change from LIFO to FIFO. The cumulative effect on prior years, net of tax, in the current retained earnings statement is required to disclose how the change affects the company's financial statements. The justification for the change should be disclosed to provide transparency to investors and stakeholders. Restated prior year income statements are necessary to show the impact of the change on past financial performance.

Question 17

Which of the following is accounted for as a change in accounting principle?
A) A change in the estimated useful life of plant assets.
B) A change from the cash basis of accounting to the accrual basis of accounting.
C) A change from expensing immaterial expenditures to deferring and amortizing them as they become material.
D) A change in inventory valuation from average cost to FIFO.

Accepted Answer

A change in inventory valuation from average cost to FIFO is considered a change in accounting principle, as it involves a change in the method used to account for inventory.

Question 18

If, at the end of a period, a company erroneously excluded some goods from its ending inventory and also erroneously did not record the purchase of these goods in its accounting records, these errors would cause
A) the ending inventory and retained earnings to be understated.
B) the ending inventory, cost of goods sold, and retained earnings to be understated.
C) no effect on net income, working capital, and retained earnings.
D) cost of goods sold and net income to be understated.

Accepted Answer

The exclusion of goods from both the ending inventory and purchase records means that the cost of goods sold and ending inventory are both understated by the same amount, resulting in no effect on net income, working capital, and retained earnings.

Question 19

A company changes from the straight-line method to an accelerated method of calculating depreciation, which will be similar to the method used for tax purposes. The entry to record this change will include a
A) credit to Accumulated Depreciation.
B) debit to Retained Earnings in the amount of the difference on prior years.
C) debit to Deferred Tax Asset.
D) credit to Deferred Tax Liability.

Accepted Answer

When switching from straight-line method to an accelerated method, the company will need to adjust their Accumulated Depreciation account to reflect the change in depreciation expense. Therefore, the entry to record this change will include a credit to Accumulated Depreciation. Options B, C, and D are not relevant to this transaction.

Question 20

A company changes from percentage-of-completion to completed-contract method, which is used for tax purposes. The entry to record this change should include a
A) debit to Construction in Process.
B) debit to Loss on Long-term Contracts in the amount of the difference on prior years, net of tax.
C) debit to Retained Earnings in the amount of the difference on prior years, net of tax.
D) credit to Deferred Tax Liability.

Accepted Answer

When a company changes from percentage-of-completion to completed-contract method, they must adjust their financial statements for the difference in income recognized under the two methods for prior years. This adjustment is recorded as a cumulative-effect-type adjustment, which means it is recorded directly to retained earnings on the balance sheet. Therefore, the correct entry to record the change would include a debit to retained earnings in the amount of the difference on prior years, net of tax.

Quiz 22: Accounting Changes and Error Analysis

Presenting consolidated financial statements this year when statements of individual companies were presented last year is

The estimated life of a building that has been depreciated for 30 years of an originally estimated life of 50 years has been revised to a remaining life of 10 years. Based on this information, the accountant should

When a company decides to switch from the double-declining balance method to the straight-line method, this change should be handled as a

Which of the following is not accounted for a change in accounting principle?

An example of a correction of an error in previously issued financial statements is a change

Which of the following disclosures is required for a change from sum-of-the-years-digits to straight-line depreciation method?

Stone Company changed its method of pricing inventories from FIFO to LIFO. What type of accounting change does this represent?

Which of the following is not a retrospective-type accounting change?

Which of the following statements is correct?

In the process of conversion from the equity method to the fair value method, the earnings or losses that the investor previously recognized under the equity method should:

Which of the following is (are) the proper time period(s) to record the effects of a change in accounting estimate?

Accounting changes are often made and the monetary impact is reflected in the financial statements of a company even though, in theory, this may be a violation of the accounting concept of

Which type of accounting change should always be accounted for in current and future periods?

Counterbalancing errors do not include

Which of the following describes a change in reporting entity?

Which of the following disclosures is required for a change from LIFO to FIFO?

Which of the following is accounted for as a change in accounting principle?

If, at the end of a period, a company erroneously excluded some goods from its ending inventory and also erroneously did not record the purchase of these goods in its accounting records, these errors would cause

A company changes from the straight-line method to an accelerated method of calculating depreciation, which will be similar to the method used for tax purposes. The entry to record this change will include a

A company changes from percentage-of-completion to completed-contract method, which is used for tax purposes. The entry to record this change should include a