Wiley Inter Acct Ch 22

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) not restate prior years' income. B) apply for an exception from the FASB. C) restate all prior years' income. D) account for the change as an adjustment to beginning retained earnings.

A) not restate prior years' income.

All of the following are examples of a change in accounting principle except a change from: A) the double-declining balance method to the straight-line method of depreciation. B) the completed-contract to percentage-of-completion method of accounting for construction contracts. C) average cost to LIFO inventory pricing. D) FIFO to average cost inventory pricing.

A) the double-declining balance method to the straight-line method of depreciation.

Which of the following describes a change in reporting entity? A) A company acquires 10% of the outstanding stock of a supplier. B) A company changes the companies included in combined financial statements. C) A manufacturing company expands its market from regional to nationwide. D) A company divests itself of a European branch sales office.

B) A company changes the companies included in combined financial statements.

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) correction of an error. B) change in estimate. C) change in accounting principle. D) counterbalancing error.

B) change in estimate.

33. The estimated life of a building that has been depreciated 30 years of an originally estimated life of 50 years has been revised to a remaining life of 10 years. Based on this information, the accountant should a. continue to depreciate the building over the original 50-year life. b. depreciate the remaining book value over the remaining life of the asset. c. adjust accumulated depreciation to its appropriate balance, through net income, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years. d. adjust accumulated depreciation to its appropriate balance through retained earnings, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years.

B. Depreciate the remaining book value over the remaining life of the asset.

Which of the following is accounted for as a change in accounting principle? A) A change in the residual value of plant assets. B) A change from the cash basis of accounting to the accrual basis of accounting. C) A change in inventory valuation from average cost to LIFO. D) Achange from double-declining balance method to the straight-line method of calculating depreciation.

C) A change in inventory valuation from average cost to LIFO.

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 accounting estimate D) Change in reporting entity

C) Change in accounting estimate

Which of the following is not one of the three types of accounting changes? A) Change from LIFO to FIFO. B) Change in the estimated useful life of an asset. C) Correction of understated depreciation expense in a prior period. D) Change in reporting entity.

C) Correction of understated depreciation expense in a prior period. Considered an error

Presenting consolidated financial statements this year when statements of individual companies were presented last year is A) a correction of an error. B) not an accounting change. C) an accounting change that should be reported by restating the financial statements of all prior periods presented. D) an accounting change that should be reported prospectively.

C) an accounting change that should be reported by restating the financial statements of all prior periods presented.

In 2016, PWT Company failed to record depreciation expense on some of its assets. When the error is discovered in 2017, it will be accounted for: A) all of these answer choices are correct. B) using pro forma data. C) as a prior period adjustment. D) prospectively.

C) as a prior period adjustment.

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) speculative basis. B) retrospective basis. C) prospective basis. D) cumulative basis.

C) prospective basis.

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) These changes are viewed as normal recurring corrections and adjustments. D) Pro forma amounts for prior periods are reported.

D) Pro forma amounts for prior periods are reported.

A change in depreciation method used is which type of accounting change? A) Retrospective-effect type. B) Counterbalancing-effect type. C) Cumulative-effect type. D) Prospective-effect type.

D) Prospective-effect type.

When a company changes from an accelerated method to the straight-line method of depreciation, this change should be handled as a A) correction of an error. B) change in accounting principle. C) prior period adjustment. D) change in accounting estimate.

D) change in accounting estimate.

The cumulative effect of a change in accounting principle is reported: A) on the income statement as an extraordinary item. B) on the retained earnings statement as an adjustment to the beginning balance of the current year. C) on the income statement as part of discontinued operations. D) on the retained earnings statement as an adjustment to the beginning balance of the earliest year presented.

D) on the retained earnings statement as an adjustment to the beginning balance of the earliest year presented.

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

F

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

F

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

F

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

F

17. Balance sheet errors affect only the presentation of an asset or liability account.

F

18. Counterbalancing errors are those that will be offset and that take longer than two periods to correct themselves.

F

3. 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.

F

5. 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.

F

9. Companies report changes in accounting estimates retrospectively.

F

A change in the useful life and salvage value of a depreciable asset is handled retrospectively. True False

False

If retrospective application of a change in accounting principle requires assumptions about management's intent in a prior period, then what approach should be used to account for the change? Retrospective. Prior period adjustment. Cumulative. Prospective.

Prospective

What approach does the FASB require when accounting for changes in accounting principle? Prospective. Retrospective. Allowance. Cumulative.

Retrospective

10. 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.

T

13. Changing the cost or equity method of accounting for investments is an example of a change in reporting entity.

T

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

T

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

T

19. For counterbalancing errors, restatement of comparative financial statements is necessary even if a correcting entry is not required.

T

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

T

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

T

4. Retrospective application refers to the application of a different accounting principle to recast previously issued financial statements—as if the new principle had always used been

T

6. 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 period presented. earliest

T

7. 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.

T

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

T

31. 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

25. 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 a. credit to Accumulated Depreciation. b. debit to Retained Earnings in the amount of the difference on prior years. c. debit to Deferred Tax Asset. d. credit to Deferred Tax Liability

a. credit to Accumulated Depreciation. You are taking more expense upfront

29. Stone Company changed its method of pricing inventories from FIFO to LIFO. What type of accounting change does this represent? a. A change in accounting estimate for which the financial statements for prior periods included for comparative purposes should be presented as previously reported. b. A change in accounting principle for which the financial statements for prior periods included for comparative purposes should be presented as previously reported. c. A change in accounting estimate for which the financial statements for prior periods included for comparative purposes should be restated. d. A change in accounting principle for which the financial statements for prior periods included for comparative purposes should be restated.

b. A change in accounting principle for which the financial statements for prior periods included for comparative purposes should be presented as previously reported.

22. 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. A 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

32. 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.

21. 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.

38. Counterbalancing errors do not include a. errors that correct themselves in two years. b. errors that correct themselves in three years. c. an understatement of purchases. d. an overstatement of unearned revenue.

b. errors that correct themselves in three years. .

34. Which of the following statements is correct? a. Changes in accounting principle are always handled in the current or prospective period. b. Prior statements should be restated for changes in accounting estimates. c. A change from expensing certain costs to capitalizing these costs due to a change in the period benefited, should be handled as a change in accounting estimate. d. Correction of an error related to a prior period should be considered as an adjustment to current year net income.

c. A change from expensing certain costs to capitalizing these costs due to a change in the period benefited, should be handled as a change in accounting estimate.

30. 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

26. Which of the following disclosures is required for a change from sum-of-the-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. Recomputation of current and future years' depreciation d. All of these are required.

c. Recomputation of current and future years' depreciation

23. 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

36. Presenting consolidated financial statements this year when statements of individual companies were presented last year is a. a correction of an error. b. an accounting change that should be reported prospectively. c. an accounting change that should be reported by restating the financial statements of all prior periods presented. d. not an accounting change.

c. an accounting change that should be reported by restating the financial statements of all prior periods presented.

27. 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.

37. An example of a correction of an error in previously issued financial statements is a change a. from the FIFO method of 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.

40. If, at the end of a period, a company erroneously excluded some goods from its ending inventory and also erroneously did not record the purchase of these goods in its accounting records, these errors would cause a. the ending inventory and retained earnings to be understated. b. the ending inventory, cost of goods sold, and retained earnings to be understated. c. no effect on net income, working capital, and retained earnings. d. cost of goods sold and net income to be understated.

c. no effect on net income, working capital, and retained earnings.

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 faithful representation. objectivity. materiality. consistency.

consistency

24. Which of the 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.

28. 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.

35. Which of the following describes a change in reporting entity? a. A company acquires a subsidiary that is to be accounted for as a purchase. b. A manufacturing company expands its market from regional to nationwide. c. A company divests itself of a European branch sales office. d. Changing the companies included in combined financial statements.

d. Changing the companies included in combined financial statements.