ACC 313 Test 3
When changing from the equity method to the fair value method, the investor must change the financial statements of all prior periods presented. A. True B. False
B
When comparative statements are presented, restatement is necessary even if a correcting journal entry for an error is not required A. True B. False
B
In a period of inflation, using LIFO can provide companies with an advantage A. True B. False
A
Inventory errors are counterbalancing errors. A. True B. False
A
Even if they have closed the prior year's books, companies still need to make correcting entries for noncounterbalancing errors A. True B. False
A
A change in reporting entity occurs when A. Changing the companies included in combined financial statements. B. A manufacturing company expands its market from regional to nationwide. C. A company divests itself of a European branch sales office. D. A company acquires a subsidiary that is to be accounted for as a purchase
A
A characteristic that is inconsistent with a counterbalancing error is: A. An error that corrects itself within three years B. An error that corrects itself within two years C. An understatement of purchases D. An overstatement of unearned revenue
A
A switch from the cash basis of accounting to the accrual basis is a correction of an error. A. True B. False
A
Any change to current or future cash flows of a company that result from making a change in accounting principle that is applied retrospectively, is seen as an indirect effect of an accounting change A. True B. False
A
As opposed to counterbalancing errors, noncounterbalancing errors will not be offset in the next accounting period A. True B. False
A
As stated by the FASB, the direct effects of changes in accounting principles need to be applied retrospectively A. True B. False
A
At December 31, 2017, Sorrento Inc. estimated bad debts as 3% of the outstanding balance of Accounts Receivable. At December 31, 2018, Sorrento determined that it should increase its estimate to 6.5%. This change is handled on a: A. Prospective basis. B. Speculative basis. C. Retrospective basis. D. Cumulative basis
A
Counterbalancing errors include inventory errors A. True B. False
A
Pam and Kat are looking at a case study for a company that recently acquired some new inventory. The company will be using FIFO for these new items. The company used LIFO for old items. Pam believes that this will require changes to be reported, but Kat disagrees. Who is correct? A. Kat, a change in accounting principles is not needed, as these are newly acquired items, so an inventory method can be adopted without reporting changes. B. Pam, the changes should be reported retrospectively, as this is the method required by the FASB. C. Kat, the changes do not need to be reported because the company used FIFO for all of their other inventory as well. D. Pam, the changes should be reported prospectively, as this is the method required by the IFRS.
A
Restatement of comparative financial statements is necessary even if a correcting entry is not required, when working with counterbalancing errors. A. True B. False
A
Which of the following contributes to international accounting convergence? A. Adoption of the retrospective approach B. Adoption of the cumulative effect approach C. Adoption of the prospective approach D. Adoption of the cumulative effect
A
Which of the following is accurate regarding indirect effects? A. Indirect effects do not change prior period amounts B. Indirect effects change prior period amounts C. Indirect effects are not included in the financial statements. D. The IFRS has very strict rules regarding the disclosure of indirect effects
A
Which of the following is an accurate statement regarding a company whose inventory balance was changed due to an accounting change? A. This change would be considered a direct effect. B. This change would be considered prospective. C. This change would be considered unnecessary. D. This change would be considered an indirect effect.
A
Which of the following is not a counterbalancing error? A. Failure to record accrued wages. B. Failure to record depreciation. C. Understatement of unearned revenue. D. Failure to record prepaid expenses.
A
CJP Co. changed its inventory method to LIFO inventory valuation from FIFO. If it is impracticable to retrospectively apply the new method, CJP Co. should: A. Account for the change as an adjustment to beginning retained earnings. B. Not restate prior years' income. C. Restate all prior years' income. D. Apply for an exception from the FASB
B
Changes in accounting estimates are reported retrospectively by companies A. True B. False
B
Cindy and Kelly are looking over the financials for a company. This company recently reestimated the useful lives for two of their machines. Cindy believes that this will have no impact on the reported depreciation expense, but Kelly disagrees. Who is correct? A. Cindy, there will not be a change in the reported depreciation expense due to the change in estimates because these changes have no impact on expenses, as they are only an estimate of how long the machine will work. B. Kelly, the depreciation expense reported will change between this year and the past year because the estimated useful lives have been changed. C. Cindy, the depreciation expense reported this year will be the same as what was reported last year because the estimated useful lives do not impact this expense. D. Kelly, the depreciation expense will be higher this year than what was reported last year because of the change in estimated useful lives.
B
Failure to record depreciation expense in a prior year would be accounted for as a prospective change. A. True B. False
B
Koppernaes Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/17 and 12/31/18 contained the following errors: 2017 Ending Inventory $23,000 overstatement Depreciation Expense $19,000 understatement 2018 Depreciation expense $42,000 overstatement Ending Inventory $52,000 understatement Assume that the 2017 errors were not corrected and that no errors occurred in 2016. By what amount will 2017 income before income taxes be overstated or understated? A. $32,000 understatement B. $42,000 overstatement C. $19,000 understatement D. $3,000 overstatement
B
The process of revising previously issued financial statements to reflect the correction of an error is called reassessment A. True B. False
B
There are two reasons companies prefer certain accounting methods, and those reasons are both political in nature A. True B. False
B
Understating ending inventory will overstate the current year's net income. A. True B. False
B
When a company changes from the equity method to the fair value method of accounting for an investment, the cost basis for the investment for accounting purposes will be the fair value of the investment at the date of the change. A. True B. False
B
Which of following would least likely to be a reason why a company would prefer certain accounting methods? A. Smooth earnings. B. Asset structure. C. Political costs. D. Bonus payments
B
Which of the following is a non counter balancing error? A. The failure to record prepaid expenses B. The failure to adjust for bad debts C. The overstatement of purchases D. The understatement of inventory
B
Which of the following is true of a change to LIFO inventory valuation from any other acceptable inventory valuation method? A. It is not allowed by FASB B. It requires no restatement of prior years' income C. It requires restatement of all prior years' income D. It is accounted for as an adjustment to beginning retained earnings
B
Which of the following statements related to changes in estimates is not correct? A. These changes are viewed as normal recurring corrections and adjustments. B. Pro forma amounts for prior periods are reported. C. Financial statements of prior periods are not restated. D. Opening balances are not adjusted for the change
B
All of the following are examples of a change in accounting principle except a change from: A. FIFO to average cost inventory pricing. B. Average cost to LIFO inventory pricing. C. The double-declining balance method to the straight-line method of depreciation. D. The completed-contract to percentage-of-completion method of accounting for construction contracts
C
How should failure to record depreciation expense in a given year be accounted for? A. By showing pro forma data B. Prospectively C. As a prior period adjustment D. Currently
C
Mina's company is working to report changes in their accounting principles. Mina explains that they need to use the retrospective approach in order to comply with the FASB. One of her coworkers thinks this is ridiculous. Why is it required? A. Because when using this approach, future useful information will be included on the financial statements to indicate future company success. B. Because this approach requires all of the previously reported results to remain the same, which is consistent with all earlier records. C. Because when using this approach, more useful information is provided to those who use the financial statements compiled by the company. D. Because it will allow the cumulative effect to be reported on the income statement, allowing potential investors to see relevant changes.
C
When a company decides to switch from the double-declining balance method to the straight-line method, this change should be handled as which of the following? A. A change in accounting principle B. A correction of an error C. A change in accounting estimate D. A prior period adjustment
C
Which of the following is not one of the three types of accounting changes? A. Change in reporting entity. B. Change in the estimated useful life of an asset. C. Correction of understated depreciation expense in a prior period. D. Change from LIFO to FIFO.
C
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. Objectivity. B. Materiality. C. Faithful representation. D. Consistency.
D
On December 31, 2017, Dodd, Inc. appropriately changed its inventory valuation method to FIFO cost from weighted-average cost for financial statement purposes. The change will result in an increase in the Inventory account at January 1, 2017. The amount of the change, net of tax is, $2,300,000 (all tax effects should be ignored). The cumulative effect of this accounting change should be reported by Dodd, Inc, in 2017: A. Retained earnings statement as a $2,300,000 deduction from the beginning balance. B. Income statement as a $2,300,000 cumulative effect of accounting change. C. Retained earnings statement as a $2,300,000 addition to the ending balance. D. Retained earnings statement as a $2,3000,000 addition to the beginning balance
D
Sylva's company made some changes by using the current and prospective approach. The changes will involve ensuring that the prior period financial statements are presented as previously reported. Which of the following changes is this an example of? A. Changes in accounting principle B. Changes due to error C. Changes in reporting entity D. Changes in accounting estimate
D
The Chalet Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/17 and 12/31/18 contained the following errors: 2017 Ending Inventory $11,000 understatement Advertising Expense $9,500 overstatement 2018 Ending inventory $14,000 overstatement Advertising expense $11,500 understatement Assume that the 2017 errors were not corrected and that no errors occurred in 2016. By what amount will 2017 income before income taxes be overstated or understated? A. $2,000 overstatement B. $5,000 understatement C. $9,500 overstatement D. $20,500 understatement
D
The cumulative effect of a change in accounting principle is reported: A. On the income statement as an extraordinary item. B. On the income statement as part of discontinued operations. C. On the retained earnings statement as an adjustment to the beginning balance of the current year. D. On the retained earnings statement as an adjustment to the beginning balance of the earliest year presented
D
The difference between these concepts can be best highlighted when recognizing that those companies motivated by ________ will look for accounting methods that decrease their income, while companies motivated by ________ will look for accounting methods that increase their net income. A. Political costs; smooth earnings B. Smooth earnings; capital structure C. Capital structure; political costs D. Political costs; capital structure
D
Whenever it is impossible to determine whether a change in principle or a change in estimate has occurred, the change should be considered a: A. Counterbalancing error. B. Change in accounting principle. C. Correction of an error. D. Change in estimate.
D
Which of the following is a noncounterbalancing error? A. The overstatement of ending inventory B. The failure to record prepaid expenses C. The understatement of purchases D. The failure to record depreciation
D
Which of the following is a reason why companies prefer certain accounting methods? A. Asset structure. B. Asset allocation. C. Comparability. D. Bonus payments
D
Which type of accounting change is accounted for in current and future periods? A. Correction of an error B. Change in accounting principle C. Change in reporting entity D. Change in accounting estimate
D