C249 IA2 CH22 - True / False

A change in accounting principle results when a company adopts a new principle in recognition of events that were previously immaterial. T/F

FALSE - Adoption of a new principle in recognition of events that were previously immaterial is not an accounting change but should be treated as a correction of an error.

If a change in an accounting estimate affects current net income by an amount equal to or greater than 1% of net income, the change should be handled retroactively. T/F

FALSE - Changes in accounting estimates must be handled prospectively, that is, no changes should be made in previously reported results. Opening balances are not adjusted and no attempt is made to catch up for prior periods.

Companies should use retrospective application if the company cannot determine the effects of the retrospective application. T/F

FALSE - Companies should not use retrospective application if the company cannot determine the effects of the retrospective application

Counterbalancing errors are two separate errors that offset one another in the same accounting period. T/F

FALSE - Counterbalancing errors are errors that will offset or correct themselves over two periods, for example, the failure to record accrued wages in period one will cause (1) net income to be overstated (2) accrued wages payable to be understated (3) wages expense to be understated, if no attempt is made to correct this error. In period two Net income will be understated, accrued wages payable ill be correct and wages payable will be overstated. The net effect of this error for the two years (at the end of the second year) is that net income, accrued wages payable and wages expense will be correct

A change from an accounting principle that is NOT generally accepted to an accounting principle that is acceptable should be treated as an accounting error. T/F

TRUE

A change in accounting principle results when a company changes from one GAAP to another GAAP. T/F

TRUE

Accounting alternatives diminish the comparability of financial information between periods and between companies. They also obscure useful historical trend data. T/F

TRUE

An understatement in ending inventory will result in a corresponding understatement of net income. T/F

TRUE

In an investor's level of influence has changed requiring the investor to change from the equity method to the fair value method, a retroactive adjustment is necessary. T/F

FALSE - If an investors level of influence has changed requiring the investor to change from the equity method to the fair value method, the earnings or losses that were previously recognized by the investor under the equity method should remain as part of the carrying amount of the investment with no retroactive restatement to the new method.

If the previously used accounting principle was NOT acceptable, a change to a generally accepted accounting principle is considered a change in principle. T/F

FALSE - If the previously used accounting principle was not acceptable a change to a GAAP is considered a correction of an error.

The FASB requires companies to use the prospective (in the future) approach for reporting changes in accounting principles. T/F

FALSE - The FASB requires companies to use the retrospective approach for reporting changes in accounting principles

The FASB takes the position that companies should retrospectively apply the indirect effects of changes in accounting principle. T/F

FALSE - The FASB takes the position that companies should not change prior period amounts for indirect effects of a change in accounting principle

GAAP requires that corrections of errors be handled prospectively and shown in the current operating section of the income statement in the year the correction is made. T/F

FALSE - The profession requires that corrections of errors be treated as prior period adjustments, be recorded in the year in which the error was discovered, and be reported in the financial statements as an adjustment to the beginning balance of retained earnings. If comparative statements are presented, the prior statements affected should be restated to correct for the error.

Instituting a policy whereby customers can now purchase merchandise on account, when in the past only cash sales were accepted, is evidence that a change in accounting principle has occurred. T/F

FALSE - This is not a change in accounting principle but rather a new transaction that results in the use of a principle not previously required.

When a company changes an accounting principle it should NOT adjust any assets or liabilities. T/F

FALSE - When a company changes an accounting principle it adjusts the carrying amounts of assets and liabilities as of the beginning of the first year presented.

When it is impossible to differentiate between a change in estimate and correction of an error, companies should consider careful estimates that later prove to be incorrect as a correct of an error. T/F

FALSE - When it is impossible to differentiate between a change in estimate and correction of an error, companies should consider careful estimates that later prove to be incorrect as a change in estimate.

Changes in estimates must be handled prospectively. T/F

TRUE

IF a counterbalancing error is discovered after the books are closed in the second year, no correcting entry is needed. T/F

TRUE

If accrued wages are overlooked at the end of the accounting period, expenses and liabilities will be understated and net income will be overstated. T/F

TRUE

If it becomes impracticable to use retrospective application for a change in accounting principle, a company should prospectively apply the new accounting principle. T/F

TRUE

Recording the purchase of land as an expense is an example of a noncounterbalancing error. T/F

TRUE

When a company changes an accounting principle one of the disclosure requirements is to show the cumulative effect of the change on retained earnings as of the beginning of the earliest period presented. T/F

TRUE

When a company changes an accounting principle under the retrospective approach it adjusts its financial statements for each prior period presented. T/F

TRUE

When a company makes changes that result in different reporting entities, the company should report the change by changing the financial statements of all prior periods presented and the revised statements should show the financial information for the new reporting entity for all periods. T/F

TRUE

Whenever it is impossible to determine whether a change in principle or a change in estimate has occurred, the change should be considered a change in estimate. T/F

TRUE