ACCT 313 chapter 22

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13. A company fails to record accrued wages for the current year. Which of the following statement is true? A. Net income for the current year is understated. B. Net income for the current year is correct. C. Retained earnings for the current year is overstated. D. Retained earnings for the current year is understated.

C Expenses for the current year are understated; therefore net income and retained earnings for the current year are overstated.

13. Corrections of errors must be accounted for: A. currently. B. by showing pro forma data. C. as prior period adjustments. D. prospectively.

C The accounting profession requires that corrections of errors be treated as prior period adjustments.

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

C Whenever it is impossible to determine the type of change that has occurred, it is to be considered a change in estimate.

8. 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 he cumulative effect of a change is computed for all of the options except a change to the LIFO method.

15. A change from LIFO inventory valuation to another inventory valuation method is an example of a: A. cumulative-effect type of accounting change. B. retrospective-effect type of accounting change. C. prospective-effect type of accounting change. D. current-effect type of accounting change.

B A change from LIFO inventory valuation to another inventory valuation requires retrospective application.

1. 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 A change in accounting estimate occurs as the result of new information or as additional experience is acquired.

21. Which of the following is not a counterbalancing error? A. Failure to record accrued wages. B. Failure to record depreciation. C. Failure to record prepaid expenses. D. Understatement of unearned revenue.

B Errors that take more than two periods to correct themselves are noncounterbalancing errors.

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

C A change in depreciation methods fits the general requirements established for the prospective-effect type of accounting change (change in estimate).

10. 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 All of the options are correct except pro forma amounts for prior periods are not reported.

17. Changes in estimate are handled on a: A. retrospective basis. B. cumulative basis. C. prospective basis. D. speculative basis.

C Changes in estimate are considered as normal recurring corrections and adjustments and retrospective adjustment is prohibited.

2. A change in the depreciation method used is an example of a retained earnings adjustment. A. True B. False

F A change in the depreciation method used is a change in accounting estimate effected by a change in accounting principle.

3. Changes in accounting estimates are handled retrospectively. A. True B. False

F Changes in estimates are handled currently and prospectively.

6. Failing to record depreciation expense in a prior year would be accounted for as a prospective change. A. True B. False

F Correction of an error is treated as a prior period adjustment.

7. Regarding changes in accounting principles, direct effects do not change prior-period amounts. A. True B. False

F Indirect effects do not change prior-period amounts

5. Recording a depreciable asset as an expense is an example of a noncounterbalancing error. A. True B. False

T Errors that take longer than two years to correct themselves are noncounterbalancing errors.

10. Inventory errors are counterbalancing errors. A. True B. False

T Inventory errors will correct themselves within two years.

3. 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 A change from the cash basis to the accrual basis is a correction of an error.

2. 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 All of the options are examples of a change in accounting principle except a change from expensing to deferring certain expenditures that have become material.

6. 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 All of the options require restatement except a change to the LIFO method. A change from LIFO would equire restatement.

4. Changes in accounting principle are generally accounted for: A. retrospectively. B. prospectively. C. currently. D. consistently.

A Changes in accounting principle are accounted for retrospectively.

4. Changes due to an error result in a restatement of the beginning retained earnings balance. A. True B. False

A Errors in prior period statements are accounted for as adjustments to the beginning balance of retained earnings.

14. 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 All of the options are reasons why companies prefer certain accounting methods except asset structure.

15. 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 All of the options involve counterbalancing errors except the failure to record depreciation.

9. Changes in estimates must be accounted for: A. consistently. B. currently. C. prospectively. D. retrospectively.

C Changes in estimates must be handled prospectively.

11. A change in reporting entity is accounted for: A. prospectively. B. currently. C. retrospectively. D. consistently.

C Changes in reporting entity are accounted for by restating the financial statements of all prior periods presented - retrospectively.

7. 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 Corrections of errors from prior periods are reported as an adjustment to the current year's beginning retained earnings.

20. Correction of errors is accounted for: A. using pro forma data. B. prospectively. C. as a prior period adjustment. D. All of the above.

C Error correction is recorded as a prior period adjustment.

19.Which of the following is an example of a change in reporting entity? A. Presenting consolidated statements in place of statements for individual companies. B. Changing the companies included in combined financial statements. C. Changing specific subsidiaries that constitute the group of companies for which the entity presents consolidated financial statements. D. All of the above.

D All of the options are examples of a change in reporting entity.

12. 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 examples of accounting errors.

12. Which of the following is not one of the three types of accounting changes? A. Change in accounting principle. B. Change in reporting entity. C. Change in accounting estimate. D. Correction of an error.

D Errors require changes in the accounting, but are not considered accounting changes.

16. A change to LIFO inventory valuation from any other acceptable inventory valuation method: A. requires restatement of all prior years' income. B. is accounted for as an adjustment to beginning retained earnings. C. is not allowed by FASB. D. requires no restatement of prior years' income.

D No restatement is required because it would be too difficult and therefore impractical.

5. 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 of the earliest year presented.

D The cumulative effect of a change in accounting principle is reported as an adjustment to beginning retained earnings of the earliest year presented.

11. IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors) always requires retrospective application to prior years for accounting changes. A. True B. False

F In general, IAS 8 requires retrospective application to prior years for accounting change. However, the standard does permit the cumulative-effect method or prospective method if a company cannot reasonably determine the amounts to which to restate prior periods.

1. A switch from the cash basis of accounting to the accrual basis is considered a change in accounting principle. A. True B. False

F It is considered a correction of an error.

8. Overstating ending merchandise inventory will understate the current year's net income. A. True B. False

F Overstating ending merchandise inventory will overstate the current year's net income.

9. When changing from the equity method to the fair-value method, the investor must change the financial statements of all prior periods presented. A. True B. False

F When changing from the equity method to the fair-value method, the investor applies the new method in its entirety once the equity method is no longer appropriate.


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