SmartBook Chapters 4 and 20

Which of the following are acceptable ways of implementing a FASB mandated change in accounting principle?

Apply the new standard to all periods presented in the financial statements. Apply the new standard in the current period and all future periods with no change to prior financial statements. Apply the new standard to the current and future periods with an adjustment to the beginning balance of retained earnings in the year of adoption.

Which of the following situations qualifies for treatment as a change in accounting principle? (Select all that apply.) Change from aging method to percent-of-credit sales method for bad debts. Change from percent-of-completion to completed contract method. Change from LIFO to FIFO. Change from direct write-off method to allowance method

Change from percent-of-completion to completed contract method. Change from LIFO to FIFO.

The retrospective approach to accounting changes supports which principles or concepts?

Comparability Consistency

The ending balance of accumulated other comprehensive income is calculated by adding this amount to the beginning balance of accumulated other comprehensive income

Current year other comprehensive income

Investors should be alert to accounting method changes that may be based on these hidden motivations

Effect on executive compensation A desire to hide potential debt covenant violations Increases in earnings not based on changes in effectiveness or efficiency

Which of the following occur with the prospective approach for reporting a change in accounting principle?

It does not restate financial statements. It reflects the changes in the current and future years only.

The three types of accounting changes are a change in Multiple select question. accounting principle. reporting entity. corporate structure. accounting estimate. fiscal years.

accounting principle. reporting entity. accounting estimate.

The rationale for retrospective application for accounting changes is that

accounting principles should be consistently applied from year to year.

Which of the following is disclosed on the balance sheet?

accumulated on other comprehensive income

The three key components to the DuPont framework include

activity financial leverage profitability

The DuPont framework shows that return on equity can be calculated by multiplying which ratios?

asset turnover equity multiplier profit margin

Which of the following is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding?

basic earnings per share

The potential tax expense or benefits of items reported as components of Other Comprehensive Income

can be shown separately for each item or aggregated and reported as one line item

Which items are considered a correction of an error when the financial statements are adjusted?

change from the cash basis of accounting to accrual basis failing to record a transaction mathematical mistakes

Which of the following are changes in accounting estimates?

change in useful life of a depreciable asset. Change in estimate of periods benefited by intangible asset.

A discontinued operation is reported when a ____ of an entity either (a) has been disposed of or (b) is classified as held for sale

component

Which of the following are used to calculate diluted earnings per share?

convertible securities options that can be converted to common stock

When a company discovers an immaterial error in a year subsequent to the year the error is made, what is the proper course of action?

correct the error in the year discovered

Failure to record an adjusting entry is a change that requires a:

correction of error

Separate reporting as a(n) ____ operation is required when the disposal of a component represents a strategic shift that has, or will have, a major effect on a company's operations and financial results.

discontinued

If a company owns multiple lines of business in different areas such as cable TV, film entertainment, networks, and publishing, and decides to sell a specific unit, the resulting gain or loss would most likely be classified as a(n)______ on the income statement.

discontinued operations

The profit margin ratio indicates the amount of net income achieved for

each dollar of sales

Which of the following is required to be disclosed on the face of a public company's income statement?

earnings per share

A change in depreciation method is treated as a change in accounting ______ that is achieved by a change in accounting _______

estimate, principle

Comprehensive income includes net income as well as other ____ and _____ that change shareholders' equity but are not included in traditional net income

gains and losses

Profitability, as measured by return on assets, can be achieved by

high asset turnover high profit margin

_____ from discontinued operations will result in additional income tax expense; _____ from discontinued operations will result in a tax benefit.

income, loss

The selection of an accounting method is important because it can

influence financial ratios. reduce comparability. complicate comparisons

The process of associating income tax effects with the income statement components that create those effects is referred to as ____ tax allocation

intraperiod

The process of associating income tax effects with the income statement components that create those effects is referred to as ____ tax allocation.

intraperiod

A high inventory turnover ratio indicates that

inventory was sold frequently during the year.

The income tax expense or benefit associated with discontinued operations

is reported separately from the tax computation for continuing operations. is included in the computation of net income.

Income smoothing describes the concept that

managers manipulate the pattern of income to not vary much between years.

If discontinued operations have a _____ effect on the income statement, they must be reported separately.

material

When an adjustment is made to the balance of retained earnings at the beginning of the adoption period to reflect the impact of a change in accounting principle, the ______ approach is used.

modified retrospective

Which implementation of a mandated change in accounting principle applies to the adoption period and future periods with an adjustment to the beginning balance of retained earnings?

modified retrospective approach

Management's assessment of permanent earnings are referred to as what?

non gaap earnings

Which of the following ratios are activity ratios?

receivables turnover asset turnover inventory turnover

The accounting treatment required for a material error in financial statements that have already been issued is to

restate the financial statements of the previous periods affected

The accounting treatment required for a material error in financial statements that have already been issued is to

restate the financial statements of the previous periods affected.

How does GAAP typically require that voluntary changes in accounting principle be accounted for?

retrospectively

When a company voluntarily changes its inventory method from LIFO to FIFO, GAAP typically requires that this change be accounted for

retrospectively

When a company voluntarily changes its inventory method from LIFO to FIFO, GAAP typically requires that this change be accounted for...

retrospectively

Accumulated other comprehensive income represents

the total of other comprehensive income to date.

Which of the following activities would constitute discontinued operations?

A retail company, like Target, sells its financial services (credit card) business. A U.S. cereal manufacturer commits to a plan to dispose of its operations in the EU.

When net income and comprehensive income are identical for all years presented in a company's income statement, which of the following is true?

A statement of comprehensive income is not required

If a discontinued operation is held for sale and there is an impairment loss, what are the acceptable methods for disclosing the impairment loss?

As a disclosure note in the notes to the financial statements. Parenthetically on the face of the income statement in discontinued operations.

What hidden motivations should investors and creditors be wary of when a company makes an accounting method change?

Increase executive compensation Avoid irregular earnings patterns Report inflated earnings that are not associated with increased economic performance

Which of the following may be objectives of companies that manage earnings?

Increasing income Smoothing income Decreasing income

Which of the following is required to correct a material error in the financial statements?

Restate the financial statements of all years presented. Include a disclosure note explaining the impact of the error on income. Adjust the beginning balance in retained earnings for the earliest period presented.

Which of the following is a category of accounting change? Multiple choice question. Accounting structure Accounting principle Asset classification Liability classification

accounting principle

Modified retrospective application for a change in accounting principle requires that the new standard is applied to the adoption period and

an adjustment is made to retained earnings at the beginning of the adoption period

Modified retrospective application for a change in accounting principle requires that

an adjustment is made to retained earnings at the beginning of the adoption period.

Retrospective application for a change in accounting principle requires that

an adjustment is made to retained earnings for the earliest period presented

Which type of change requires a justification in the notes to the financial statements?

change in depreciation method

Which of the following changes are treated on a prospective basis because the change affects the current period and future periods?

change in estimate

A high inventory turnover ratio could be caused by

low ending inventory levels. a superior sales force

non gaap earnings are...

management's estimates and view of earnings

Retrospective application requires that

previous financial statements are revised to reflect the use of the new method.

When a company changes from one acceptable accounting method to another, this is treated as a change in accounting...

principle

The correction of a material error in the prior year's financial statements is considered a

prior period adjustment

What method is used to account for a change in accounting estimate?

prospective

A change in depreciation method is accounted for by

prospectively applying the new method

The Sarbanes-Oxley Act requires that if non-GAAP earnings are included in a report or any public disclosure, the company must

provide a reconciliation with earnings according to GAAP

Categorizing operating expenses as nonoperating expenses is an example of

income statement classification shifting

When is the prospective approach used in accounting changes?

For a change in accounting estimate. For a change in accounting principle if it is impracticable to determine the effect of the change on previous years.

What is one difference in the reporting requirements between most changes in accounting estimates and a change in depreciation method?

A change in depreciation method requires a disclosure of why the new method is preferred, and the others do not.

Which of the following may provide useful information about a company's ability to continue to generate a high level of sales and collect its receivables in a timely manner?

Average collection period Receivable turnover ratio

Which of the following are changes in accounting estimates?

Changing the estimate for future warranty expenses. Changing the bad debt estimate. Changing the useful life of an asset.

evenues, expenses, gains, losses, and income tax related to a(n) ______ _______must be removed from continuing operations and reported separately on the income statement.

discontinued operations

when a company changes accounting methods, if the effects of the change can be calculated, the cumulative effect of the change is reflected

in the beginning balance of retained earnings for the earliest year presented for the years prior to that date

When a discontinued operation is sold before the end of the reporting period, the ____ or _____ from operations and the gain or loss on the disposal of assets is included in the reported income

income and loss

A prior period adjustment requires an adjustment to

the beginning balance of retained earnings

When an immaterial error is discovered in the same year it is made before the financial statements are issued, what is the appropriate course of action?

Reverse the erroneous journal entry and record the correct entry.

Which of the following are used in the computation of comprehensive income?

net income

Discontinued operations should be reported on the income statement...

net of tax below income from continuing operations.

The prospective approach for reporting a change in accounting principle requires that

no change is made to previous years' financial statements.

The revision of an erroneous accounting estimate is accounted for as a(n)

error correction

New information that becomes available about an event or transaction frequently results in a change in

estimate

The profit margin ratio measures the company's ability to withstand either _______ expenses or _______ revenues.

higher, lower

A(n) _____ loss is reported if a discontinued operation is held for sale and the book value of the assets is more than the fair value minus cost to sell

impairment

Any long-lived asset, whether tangible or intangible, should have its balance reduced if there has been a significant _____ of value

impairment

If a component of the business qualifies for discontinued operations treatment, which of the following statements are true?

All related revenues, expenses, gains, and losses must be removed from continuing operations. The tax expense effect is removed from continuing operations.

Changes in accounting estimates are reflected in the financial statements of the_____ period and _____ periods.

current, future

What factors strongly contribute to the need for changes in estimates? (Select all that apply.)

New information becomes available Experience relating to the estimates

When a component has been sold and qualifies for treatment as a discontinued operation, the reported income effects disclosed will include which of the following items?

Operating income or loss of the component from the beginning of the reporting period to the disposal date. Gain or loss on disposal of the component's assets.

When a company changes accounting methods and the effects of the change can be calculated for each period, which of the following occurs?

Retained earnings is adjusted for the earliest period presented. The adjusted net income for each year is shown on the retained earnings statement for that year.

Which of the following are commonly used to assess a company's profitability?

Return on assets Return on equity Profit margin on sales

The - Act established a requirement that a if a company includes non-GAAP earnings in any report filed with the SEC or any public disclosure or press release, it must also provide a ___ with earnings determined according to GAAP.

SOX act reconciliation

Which of the following information must be included in the notes to the financial statements regarding discontinued operations?

The major classes of assets and liabilities of the component. The reason for the discontinuance. The identity of the component.