ACCT370 Chapter 5

Which of the following requires registrants to make disclosures about the expected financial statement effects of recently issued accounting standards that have not yet been adopted?

SEC

The SEC staff is charged with

ensuring compliance with the Commission's accounting and disclosure requirements.

Which of the following is considered a change in reporting entity?

Adding a subsidiary not previously included in prior years' consolidated financial statements.

A prior-period adjustment includes which of the following? (Check all that apply.)

An addition to or subtraction from beginning Retained earnings. Correction of the appropriate asset or liability balances.

Which of the following is needed when an error is so significant that investors must be alerted when the error is discovered that they should no longer rely on the previously issued financial statements?

Big R Reissuance Restatement

Using the same accounting methods to describe similar economic events from period to period is referred to as

Blank 1: consistency

The income effects of a changed estimate are accounted for in the period of the change and/or in future periods under the approach.

Blank 1: prospective

A - transaction occurs when a reporting entity enters into a transaction with individuals or other business that are in some way connected with it or its management or board of directors.

Blank 1: related Blank 2: party

In general, U.S. GAAP requires that firms use the approach to account for changes in accounting principles.

Blank 1: retrospective

Which of the following are examples of subsequent events that must be disclosed?

Catastrophic loss. Loss of a major customer. Issuance of equity securities.

Which of the following contributed to the drastic jump in financial statement restatements that took place in 2005 and 2006?

Internal control provisions under SOX Section 404. Leases and stock options backdating.

Under which of the following circumstances is it impracticable to apply a change in accounting principle retrospectively?

When the retroactive effect is indeterminable.

Based on new information, a firm changes from the straight-line method of depreciation to double-declining balance method. This change will be accounted for as

a change in accounting estimate.

A change in accounting principle occurs when

a firm voluntarily changes from one generally accepted accounting principle to another.

Under the retrospective approach to accounting for changes in accounting principles,

a journal is made to adjust the firm's Retained earnings balance to reflect the cumulative effect of the accounting principle change. a journal entry is made to adjust all balance sheets accounts to what they would have been if the new method had always been used. prior years' financial statements are revised to reflect the impact of the new accounting principle change.

Decreasing the salvage value of equipment from $50,000 to $35,000 is a(n) __.

change in accounting estimate

Adopting the new FASB standard on lease accounting is a

change in accounting principle.

Accounting changes include

change in accounting principle. change in accounting estimate. change in reporting entity.

Match the type of accounting change with the appropriate example of that change.

Change in accounting principle matches Choice Adoption of the new FASB standard on revenue recognition. Change in accounting estimate matches Choice Change in depreciation method. Change in reporting entity matches Choice Reporting consolidated financial statements in place of individual financial statements.

Which of the following are considered changes in accounting estimate? (Check all that apply.)

Change in the salvage value of machinery. Change in the percentage of uncollectible accounts.

Common non-GAAP metrics include (Check all that apply.)

Earnings before restructuring charges. EBITDA.

True or false: A subsequent event occurs before the close of a firm's fiscal year-end but after the financial statements are issued.

False

True or false: Accounting errors and irregularities are always a result of outright fraud.

False

True or false: In general, U.S. GAAP requires that firms use the cumulative effect approach to account for changes in accounting principles.

False

Which of the following are true of changes in accounting estimates?

If the change has a material effect, the dollar amount of the effect must be disclosed. Prior-year income is never adjusted. They are a result of new information indicating that previous estimates are no longer valid.

Which of the following causes of error or irregularities are at the heart of some of the largest corporate failures in U.S. history?

Outright financial fraud to inflate earnings and overstate net assets. Attempts by management to exploit the flexibility in GAAP.

Which of the following are ways to disclose corrections of errors in previously issued financial statements?

Reissuance Restatements Revision Restatements

Which of the following are true regarding restatements after 2006?

Restatements declined in severity after 2006. Restatements declined in frequency after 2006.

Which of the following is needed when an error is not so significant that it renders previously issued financial statements unreliable?

Revision Restatement Little r

Which of the following explains the important accounting choices the reporting entity uses to account for selected transactions and accounts?

Summary of Significant Accounting Policies

The cumulative effect of an accounting principle change is the difference between which two of the following?

The cumulative earnings previously reported under the old method. What cumulative earnings would have been in all prior years if the new method had always been used.

Which of the following will require the disclosure of subsequent events?

The subsequent event is material and likely to influence investors' appraisal of the risk and return prospects of the reporting entity.

Which of the following are examples of related-party transactions?

Transactions between subsidiaries of a common parent. Transactions between the reporting entity and members of its board of directors.

Changes in accounting estimates that result from a change in accounting principle are

accounted for as a change in estimate.

A business combination accounted for under the ______ method is specifically excluded from the definition of a change in reporting entity.

acquisition

Consistency

allows users to identify trends in a company's performance over time. enhances the usefulness of accounting information for making decisions.

A company's external auditors are charged with

auditing the financial statements to ensure they are fairly presented in all material respects in accordance with GAAP.

Consistency in the application of accounting standards is not always possible because

firms can voluntarily revise estimates used to compute net income. firms can voluntarily switch accounting methods. accounting standards-setting bodies issue new standards requiring companies to change accounting methods.

The Summary of Significant Accounting Policies

improves financial statement users' ability to make valid intercompany comparisons. explains the important accounting choices the reporting entity uses to account for selected transactions and accounts.

If a firm wishes to change their inventory valuation method but does not have the detailed records needed to retroactively restate prior periods' results,

it is impracticable to apply a change in accounting principle retrospectively.

A prior-period adjustment is used to correct

material errors discovered after the year in which the error is made.

The cumulative effect approach is allowed when there is a change in accounting principle if

retrospective restatement is not practicable. a particular standard specifies that it be used.

Accounting errors or irregularities occur because of

simple oversight. a misapplicaton of GAAP.

Under the cumulative effect approach

the balance sheet as of the first day of the year the new standard is adopted is adjusted. no prior-period financial statements are restated.

Non-GAAP metrics are allowed provided

they are not given greater prominence than GAAP disclosures. any non-GAAP metric is accompanied by a reconciliation to the closest comparable GAAP metric. they are not misleading.

The SEC disclosure requirements of the expected financial statement effects of recently issued accounting standards are useful to analysts because

they provide information that allows forecasts to be compared to historical numbers produced using the same accounting methods.