conceptual problems ch. 22 accy 304

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

False

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

False

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

False

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

False

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

False

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

False

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.

False

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.

False

9. Companies report changes in accounting estimates retrospectively.

False

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.

True

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

True

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

True

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

True

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

True

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

True

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

True

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 been used.

True

25. A company changes from the straight-line method to an accelerated method of calculating depreciation, which will be similar to the method used for tax purposes. The entry to record this change will 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

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

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

22. Which of the following is not accounted for 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 the completed-contract to the percentage-of-completion method

B

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

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

33. The estimated life of a building that has been depreciated for 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

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

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 construction 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

26. Which of the following disclosures is required for a change from sum-of-the-years-digits to straight-line depreciation method? 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

27. A company changes from percentage-of-completion to completed-contract method, which is 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

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

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

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

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

39. If, at the end of a period, a company using perpetual inventory 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

40. In the process of conversion from the equity method to the fair value method, the earnings or losses that the investor previously recognized under the equity method should: a. be ignored. b. be subtracted from the carrying value of the securities. c. remain as a part of the carrying amount of the investment. d. be shown in the income statement.

C

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

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

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

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 earliest period presented.

True

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.

True

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

True