Intermediate Accounting Chapter 22 quiz review

A change in accounting principle is a change that occurs as the result of new information or additional experience.

False

Accounting errors include changes in estimates that occur because a company acquires more experience, or as it obtains additional information.

False

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

Companies account for a change in depreciation methods as a change in accounting principle.

False

Companies report changes in accounting estimates retrospectively.

False

Counterbalancing errors are those errors that take longer than two periods to correct themselves.

False

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

When changing from the equity method to the fair value method, a company must eliminate the balance in Unrealized Holding Gain or Loss.

False

When companies make changes that result in different reporting entities, the change is reported prospectively.

False *Prospective application is the application of a new accounting policy to transactions after the date of the policy change, with recognition of the effect of changes in accounting estimates in the current and future periods.*

If an FASB standard creates a new principle, expresses preference for, or rejects a specific accounting principle, the change is considered clearly acceptable.

True

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

Changing the cost or equity method of accounting for investments is an example of a change in reporting entity. *The equity method is applied when a company's ownership interest in another company is valued at 20-50% of the stock in the investee. The equity method requires the investing company to record the investee's profits or losses in proportion to the percentage of ownership*

True *A change in reporting entity is a change that results in financial statements that are effectively those of a different reporting entity. This usually involves changing from individual to consolidated reporting, or altering the subsidiaries that make up a group of entities whose results are consolidated.*

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

Companies must make correcting entries for noncounterbalancing errors, even if they have closed the prior year's books.

True

Companies record corrections of errors from prior periods as an adjustment to the beginning balance of retained earnings in the current period.

True

Errors in financial statements result from mathematical mistakes or oversight or misuse of facts that existed when preparing the financial statements.

True

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

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

For counterbalancing errors, restatement of comparative financial statements is necessary even if a correcting entry is not required. *Non-counterbalancing errors are those that will not be automatically offset in the next accounting period. It makes no difference whether the books are closed or still open, a correcting journal entry is necessary.*

True *A counterbalancing error occurs when an an error is made that cancels out another error. It makes no difference whether the books are closed or still open; a correcting journal entry is necessary.*

Retrospective application is considered impracticable if a company cannot determine the prior period effects using every reasonable effort to do so.

True *Retrospective application means adjusting the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied*