lucky17 Full Disclosure
T/F A change in accounting principle is a change that occurs as the result of new information or additional experience.
False
T/F Accounting errors include changes in estimates that occur because a company acquires more experience, or as it obtains additional information.
False
T/F Adoption of a new principle in recognition of events that have occurred for the first time or that were previously immaterial is treated as an accounting change.
False
T/F Balance sheet errors affect only the presentation of an asset or liability account.
False
T/F Companies account for a change in depreciation methods as a change in accounting principle.
False
T/F Companies report changes in accounting estimates retrospectively.
False
T/F Counterbalancing errors are those that will be offset and that take longer than two periods to correct themselves.
False
T/F When a company changes an accounting principle, it should report the change by reporting the cumulative effect of the change in the current year's income statement.
False
T/F When companies make changes that result in different reporting entities, the change is reported prospectively.
False
Changes in accounting principle are generally accounting for a. retrospectively b. prospectively c. currently d. consistently
a. retrospectively
Stone Company changed its method of pricing inventories from FIFO to LIFO. What type of accounting change does this represent?
A change in accounting principle for which the financial statements for prior periods included for comparative purposes should be presented as previously reported.
A company changes from straight-line to an accelerated method of calculating depreciation, which will be similar to the method used for tax purposes. The entry to record this change should include a credit to
Accumulated Depreciation.
A company using a perpetual inventory system neglected to record a purchase of merchandise on account at year end. This merchandise was omitted from the year-end physical count. How will these errors affect assets, liabilities, and stockholders' equity at year end and net income for the year? (overstate, understate, no effect)
Assets: Understate. Liabilities: Understate. Stockholder's Equity: No effect. Net income: No effect.
Which type of accounting change should always be accounted for in current and future periods?
Change in accounting estimate
A company changes from percentage-of-completion to completed-contract, which is the method used for tax purposes. The entry to record this change should include a debit to
Retained Earnings in the amount of the difference on prior years, net of tax.
T/F An indirect effect of an accounting change is any change to current or future cash flows of a company that result from making a change in accounting principle that is applied retrospectively.
True
T/F Changing the cost or equity method of accounting for investments is an example of a change in reporting entity.
True
T/F Companies must make correcting entries for non-counterbalancing errors, even if they have closed the prior year's books.
True
T/F Companies record corrections of errors from prior periods as an adjustment to the beginning balance of retained earnings in the current period.
True
T/F Errors in financial statements result from mathematical mistakes or oversight or misuse of facts that existed when preparing the financial statements.
True
T/F For counterbalancing errors, restatement of comparative financial statements is necessary even if a correcting entry is not required.
True
T/F If a FASB standard creates a new principle, expresses preference for, or rejects a specific accounting principle, the change is considered clearly acceptable.
True
T/F One of the disclosure requirements for a change in accounting principle is to show the cumulative effect of the change on retained earnings as of the beginning of the earliest period presented.
True
T/F Retrospective application is considered impracticable if a company cannot determine the prior period effects using every reasonable effort to do so.
True
T/F Retrospective application refers to the application of a different accounting principle to recast previously issued financial statements—as if the new principle had always been used.
True
T/F When it is impossible to determine whether a change in principle or change in estimate has occurred, the change is considered a change in estimate.
True
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
a. current period and prospectively
Which of the following is not treated as 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. an change from full cost to successful efforts in the extractive industry d. a change from completed contract to percentage of completion
b. a change to a different method of depreciation for plant assets
Which of the following is not a reason why companies prefer certain accounting methods? a. bonus payments b. asset structure c. political costs d. smooth earnings
b. asset structure
Management's discussion and analysis (MD & A) section covers all of the following financial aspects of an enterprise's business except a. capital resources b. cash flows c. liquidity d. results of operations
b. cash flows
A change that occurs as the result of new information or as additional experience is acquired is a a. change in accounting principle b. change in accounting estimate c. change in reporting entity d. correction of an error
b. change in accounting estimate
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
b. 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 a. materiality b. consistency c. conservatism d. objectivity
b. consistency
When the scope of the auditor's examination is limited or affected by conditions or restrictions, the auditor would a. express an adverse opinion b. express a qualified opinion c. disclaim an opinion d. issue an unqualified opinion
b. express a qualified opinion
All of the following involve counterbalancing errors except the a. failure to record prepaid expenses b. failure to record depreciation c. understatement of ending inventory d. overstatement of purchases
b. failure to record depreciation
Prospective financial statements that present, to the best of the responsible party's knowledge and belief, an entity's expected financial position, results of operations, and cash flows is a financial a. estimate b. forecast c. projection d. forecast or projection
b. forecast
Areas directly affected by FASB standards included all of the following except: a. financial statements b. management's discussion and analysis c. notes to the financial statements d. supplementary information
b. management's discussion and analysis
If a business entity entered into certain related party transaction, it would be required to disclose all of the following information except the a. nature of the relationship between the parties to the transactions b. nature of any future transactions planned between the parties and the terms involved c. dollar amount of the transactions for each of the periods for which an income statement is presented d. amounts due from or to related parties as of the date of each balance sheet presented
b. nature of any future transactions planned between the parties and the terms involved
Theoretically, in computing the receivables turnover, the numerator should include a. net sales b. net credit sales c. sales d. credit sales
b. net credit sales
The rate of return on common stock equity is calculated by dividing a. net income by average common stockholders' equity b. net income less preferred dividends by average common stockholders' equity c. net income by ending common stockholders' equity d. net income less preferred dividends by ending common stockholders' equity
b. net income less preferred dividends by average common stockholders' equity
If the financial statements examined by an auditor lead the auditor to issue an opinion that contains an exception that is not of sufficient magnitude to invalidate the statement as a whole, the opinion is said to be a. unqualified b. qualified c. adverse d. exceptional
b. qualified
All of the following situations require the restatement of prior period financial statements except a change a. in the method of accounting for long-term construction contracts b. to the LIFO inventory method from another method c. to or from the full cost method of accounting in the extractive industries d. all of the options require restatement
b. to the LIFO inventory method from another method
A segment of a business enterprise is to be reported separately when the revenues of the segment exceed 10% of the a. total combined revenues of all segments reporting profits b. total revenues of all the enterprise's industry segments c. total export and foreign sales d. combined net income of all segments reporting profits
b. total revenues of all the enterprise's industry segments
Which of the following statements related to interim reporting is not correct? a. inventory market declines should not be deferred beyond the interim period unless they are temporary b. When LIFO inventories are liquidated at an interim date and are expected to be replaced by year end, cost of goods sold should include the expected cost of replacing the liquidating LIFO base c. Companies may use the gross profit method for annual inventory pricing, but disclosure of the method is required d. planned variances under a standard cost system ordinarily should be deferred
c. Companies may use the gross profit method for annual inventory pricing, but disclosure of the method is required
Which of the following best characterizes the difference between a financial forecast and a financial projections? a. forecasts include a complete set of financial statements, while projections include only summary financial data b. a forecast is normally for a full year or more and a projection presents data for less than a year c. a forecast attempts to provide information on what is expected to happen, whereas a projection may provide information on what is not necessarily expected to happen d. a forecast includes data which can be verified about future expectations, while the data in a projection is not susceptible to verification
c. a forecast attempts to provide information on what is expected to happen, whereas a projection may provide information on what is not necessarily expected to happen
Corrections of errors from prior periods are reported a. as an extraordinary item b. between extraordinary items and net income on the income statement c. as an adjustment to the current year's beginning retained earnings d. as an adjustment of beginning retained earnings of the earliest year presented
c. as an adjustment to the current year's beginning retained earnings
Corrections of error must be accounted for a. currently b. by showing pro forma data c. as prior period adjustments d. prospectively
c. as prior period adjustments
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
c. change in accounting estimate
The required approach for handling extraordinary items in interim reports is to a. prorate them over all 4 quarters b. prorate them over the current and remaining quarters c. change or credit the loss or gain in the quarter that it occurs d. disclose them only in the notes
c. change or credit the loss or gain in the quarter that it occurs
A company changes from percentage of completion to completed contract, which is the method 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
c. debit to Retained Earnings in the amount of the difference on prior years, net of tax
Which of the following ratios measures long term solvency? a. acid test ratio b. receivables turnover c. debt to total assets d. current ratio
c. debt to total assets
Common notes to the financial statements include disclosures for all of the following except a. credit claims b. equity holders' claims c. executive compensation d. property, plant & equipment
c. executive compensation
An example of a correction of an error in previously issued financial statements is a change a. from the FIFO method to 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
c. from the cash basis of accounting to the accrual basis of accounting
Which of the following is not a reason for the increase in disclosure requirements? a. accounting as a control and monitoring device b. complexity of the business environment c. full disclosure principle d. necessity for timely information
c. full disclosure principle
The MD&A section of an enterprise's annual report is to cover the following 3 items: a. income statement, balance sheet, and statement of owners' equity b. income statement, balance sheet, and statement of cash flows c. liquidity, capital resources, and results of operations d. changes in stock price, mergers, and acquisitions
c. liquidity, capital resources, and results of operations
An example of an inventory accounting policy that should be disclosed in a Summary of Significant Accounting Policies is the a. amount of income resulting from the involuntary liquidation of LIFO b. major backlogs of inventory orders c. method used for pricing inventory d. composition of inventory into raw materials, work in process, and finished goods
c. method used for pricing inventory
The calculation of the number of times interest is earned involves dividing a. net income by annual interest expense b. net income plus income taxes by annual interest expense c. net income plus income taxes and interest expense by annual interest expense d. none of these
c. net income plus income taxes and interest expense by annual interest expense
Which of the following statements related to changes in estimates is not correct? a. financial statements of prior periods are not restated b. opening balances are not adjusted for the change c. pro forma amounts for prior periods are reported d. these changes are viewed as normal recurring corrections and adjustments
c. pro forma amounts for prior periods are reported
Changes in estimates must be accounted for a. consistently b. currently c. prospectively d. retrospectively
c. prospectively
Which of the following disclosures is required for a change from sum of years digits to straight line? a. the cumulative effect on prior years, net of tax, in the current retained earnings statement b. restatement of prior years' income statements c. re-computation of current and future years' depreciation d. all of these are required
c. re-computation of current and future years' depreciation
The financial statements are not corrected for a. errors b. illegal acts c. related party transactions d. irregularities
c. related party transactions
A change in reporting entity is accounted for a. prospectively b. currently c. retrospectively d. consistently
c. retrospectively
In preparing the auditor's report, the auditor follows all of the following reporting standards except the report shall a. contain either an expression of opinion regarding the financial statements or an assertion that an opinion cannot be expressed b. identify circumstances in which accounting principles have not been consistently observed in the current period in relation to the prior period c. state whether the financial statements are presented in accordance with generally accepted auditing standards d. all of the options are followed by the auditor
c. state whether the financial statements are presented in accordance with generally accepted auditing standards
Which of the following is not a retrospective type accounting change? a. completed contract method to the percentage of completion method for long term 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
c. sum of the years digits method to the straight line method
An operating segment is identified as a reportable segment if a. its revenue is greater than 10% of the combined revenue of all the company's operating segments b. its identifiable assets are greater than 10% of the combined assets of all operating segments c. the absolute amount of its profit (loss) is 10% or more of the greater of the combined operating segments' profit or the combined operating segments' loss d. any of the options are satisfied
c. the absolute amount of its profit (loss) is 10% or more of the greater of the combined operating segments' profit or the combined operating segments' loss
The cumulative effect of an accounting change is not computed for a change a. from the LIFO method to the FIFO method b. to the percentage of completion method from the completed contract method c. to the LIFO method from the FIFO method d. all of the options require computation of the cumulative effect of the change
c. to the LIFO method from the FIFO method
Events that occur after December 31, 2008 balance sheet date (but before the balance sheet is issued) and provide additional evidence about conditions that existed at the balance sheet date and affect the realizability of accounts receivable should be a. discussed only in the MD&A section of the annual report b. disclosed in the Notes to the Financial Statements c. used to record an adjustment to Bad Debt Expense for the year ending December 31, 2008 d. used to record an adjustment directly to the Retained Earnings account
c. used to record an adjustment to Bad Debt Expense for the year ending December 31, 2008
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
consistency
Which of the following should be disclosed in Summary of Significant Accounting Policies? a. Types of executory contracts b. Amount for cumulative effect or change in accounting principle c. Claims of equity holders d. Depreciation method followed
d. Depreciation method followed
Which of he 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
d. a change in inventory valuation from average cost to FIFO
Extraordinary items that occur in interim reports are a. prorated over the 4 quarters b. omitted from the quarterly net income c. disclosed only by note d. absorbed entirely in the quarter in which they occur
d. absorbed entirely in the quarter in which they occur
All of the following are examples of accounting errors except a a. change from an unacceptable accounting principle to an acceptable accounting principle b. change in estimate that occurs due to a clearly unrealistic original estimate c. misuse of facts d. all of the options are accounting errors
d. all of the options are accounting errors
The FASB requires that a company report all of the following information except a. segment assets b. major customers c. information about products and services d. all of the options are reported
d. all of the options are reported
Which of the following would not be an opportunity for fraudulent financial reporting? a. accounting estimates, requiring significant subjective judgment b. unusual or complex transactions c. weak or nonexistent internal accounting controls d. all of the options would be opportunities
d. all of the options would be opportunities
The profession requires disaggregated information in the following ways a. products or services b. geographic areas c. major customers d. all of these
d. all of these
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
d. all of these are required
In considering interim financial reporting, how does the profession conclude that such reporting should be viewed? a. as a "special" type of reporting that need not follow generally accepted accounting principles b. as useful only if activity is evenly spread throughout the year so that estimates are unnecessary c. as reporting for a basic accounting period d. as reporting for an integral part of an annual period
d. as reporting for an integral part of an annual period
The payout ratio is calculated by dividing a. dividends per share by earnings per share b. cash dividends by net income plus preferred dividends c. cash dividends by market price per share d. cash dividends by net income less preferred dividends
d. cash dividends by net income less preferred dividends
A switch from the cash basis of accounting to the accrual basis is considered a a. change in accounting principle b. change in accounting estimate c. change in reporting entity d. correction of an error
d. correction of an error
The full disclosure principle, as adopted by the accounting profession, is best described by which of the following? a. all information related to an entity's business and operating objectives is required to be disclosed in the financial statements b. information about each account balance appearing in the financial statements is to be included in the notes to the financial statements c. enough information should be disclosed in the financial statements so a person wishing to invest in the stock of the company can make a profitable decision d. disclosure of any financial facts significant enough to influence the judgment of an informed reader
d. disclosure of any financial facts significant enough to influence the judgment of an informed reader
Arguments for requiring published forecasts include all of the following except that a. investment decisions are based on future expectations b. forecasts are already circulated informally, but are uncontrolled c. circumstances now change so rapidly that historical information is no longer adequate for prediction d. disclosure of forecasts will be beneficial to organizations
d. disclosure of forecasts will be beneficial to organizations
All of the following are examples of a change in accounting principle except a change from a. average cost to LIFO inventory pricing b. FIFO to average cost c. the completed contract to percentage of completion method of accounting for construction contracts d. expensing certain expenditures that were immaterial to deferring and amortizing them because they have become material
d. expensing certain expenditures that were immaterial to deferring and amortizing them because they have become material
Which of the following post balance sheet events would generally require disclosure, but no adjustment of the financial statements? a. retirement of the company president b. settlement of litigation when the event that gave rise to the litigation occurred prior to the balance sheet date c. employee strikes d. issue of a large amount of capital stock
d. issue of a large amount of capital stock
Which of the following subsequent events (post balance sheet events) would require adjustment of the accounts before issuance of the financial statements? a. loss of plant as a result of fire b. changes in the quoted market prices of securities held as an investment c. loss on an uncollectible account receivable resulting from a customer's major flood loss d. loss on a lawsuit, the outcome of which was deemed uncertain at year end
d. loss on a lawsuit, the outcome of which was deemed uncertain at year end
A subsequent event that would require adjustment of the financial statements is the a. sale of bonds or capital stock b. settlement of litigation when the event causing the claim took place after the balance sheet date c. loss of plant or inventories from a flood d. loss on an accounts receivable resulting from a customer's bankruptcy
d. loss on an accounts receivable resulting from a customer's bankruptcy
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 on the earliest year presented
d. on the retained earnings statement as an adjustment to the beginning balance on the earliest year presented
APB Opinion No. 28 indicates that a. all companies that issue an annual report should issue interim financial reports b. the discrete view is the most appropriate approach to take in preparing interim financial reports c. the 3 basic financial statements should be presented each time an interim period is reported upon d. the same accounting principles used for the annual report should be employed for interim reports
d. the same accounting principles used for the annual report should be employed for interim reports