ACCT 3021 Chapter 22

Marg Corporation has a change in accounting that requires Marg to restate the financial statements of all prior periods presented and disclose in the year of change the effect on net income and earnings per share data for all prior periods presented. What is this change most likely the result of? A : a change in reporting entity B : a change in depreciation methods C : a change in estimated recoverable mineral reserves D : a change in accounting estimate

A : a change in reporting entity

Which of the following would incorrectly be considered a direct effect of a change in accounting principles? A : an employee profit-sharing plan based on net income when a company uses the percentage-of-completion method. B : the inventory balance as a result of a change in the inventory valuation method. C : deferred income tax effects of an impairment adjustment resulting from applying the lower-of-cost-or-market test to the adjusted inventory balance. D : an impairment adjustment resulting from applying the lower-of-cost-or-market-test to the adjusted inventory balance.

A : an employee profit-sharing plan based on net income when a company uses the percentage-of-completion method.

According to the FASB, reporting changes in an accounting principle must be done using the A : retrospective approach. B : current approach. C : prospective approach. D : futuristic approach.

A : retrospective approach.

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

A change in inventory valuation from average cost to LIFO.

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

A company changes the companies included in combined financial statements.

Which of the following is not a reason why companies prefer certain accounting methods? Asset structure. Smooth earnings. Bonus payments. Political costs.

Asset structure.

The parts of applying the current and prospective approach in accounting for a change in an estimate include: I. reporting current and future financial statements on a new basis. II. disclosing the effect on net income and earnings per share data in the year of change only. III. making no adjustment to current period opening balances for purposes of catchup. IV. restating prior period financial statements. A : I, III, and IV. B : I, II, and III. C : I, II, and IV. D : II, III, and IV.

B : I, II, and III.

Which of the following are changes in accounting principles? I. a change from FIFO to average cost. II. using a different method of depreciation for new plant assets. III. a change from completed-contracts to percentage-of-completion. IV. a change from LIFO to FIFO for inventory valuation. A : I, II, and III. B : I, III, and IV. C : I, II, and IV. D : II, III, and IV.

B : I, III, and IV.

Franco Company has accounted for its inventory using the NIFO (next-in, first-out) inventory method for the past two years. During the current year, they changed to the FIFO inventory method at the insistence of their public accountant. How should the effect of this change be reported, net of applicable income taxes? A : In the current retained earnings statement after net income but before dividends. B : In the current retained earnings statement as an adjustment of the opening balance. C : In the current income statement after discontinued segment items. D : In the current income statement after income from continuing operations and before discontinued segment items.

B : In the current retained earnings statement as an adjustment of the opening balance.

The financial statement characteristics that is adversely affected by accounting changes is A : usefulness. B : consistency. C : relevance. D : timeliness.

B : consistency.

Turloon Company experienced a change in accounting principle which it accounted for in the following manner: opening balances were not adjusted and no attempt was made to allocate charges or credits for prior events. This method of recording an accounting change handles the change in which of the following ways? A : retrospectively B : prospectively C : haphazardly D : currently

B : prospectively

A company that reports changes retrospectively would do which of the following? A : report the cumulative effect in the current year's income statement as an irregular item B : show any cumulative effect of the change as an adjustment to beginning retained earnings of the earliest year presented C : make changes prospectively D : not change any prior-year financial statements

B : show any cumulative effect of the change as an adjustment to beginning retained earnings of the earliest year presented

Which of the following is a reason why companies prefer certain accounting methods? Comparability. Asset allocation. Bonus payments. Asset structure.

Bonus payments.

Sulton Company purchased machinery that cost $300,000 on January 1, 2020. The entire cost was recorded as an expense. The machinery has a nine-year life and a $12,000 residual value. Sulton uses the straight-line method to account for depreciation expense. The error was discovered on December 10, 2022. Ignore income tax considerations. Sulton's income statement for the year ended December 31, 2022, should show that the cumulative effect of this error is which of the following? A : $224,000. B : $221,333. C : $ -0-. D : $236,000.

C : $ -0-.

The general rule for differentiating between a change in an estimate and a correction of an error can be understood in which of the following ways? A : If a generally accepted accounting principle is involved, it's usually a change in an estimate. B : If a generally accepted accounting principle is involved, it's usually a correction of an error. C : A careful estimate that later proves to be incorrect should be considered a change in an estimate. D : It is based on the materiality of the amounts involved. Material items are handled as a correction of an error, whereas immaterial amounts are considered a change in an estimate.

C : A careful estimate that later proves to be incorrect should be considered a change in an estimate.

Changing specific subsidiaries that constitute the group of companies for which consolidated financial statements are prepared is an example of which of the following? A : A change in accounting estimate. B : A change in accounting principle. C : A change in reporting entity. D : A change in segment reporting.

C : A change in reporting entity.

Which type of accounting change is accounted for in current and future periods? Change in reporting entity Change in accounting principle Correction of an error Change in accounting estimate

Change in accounting estimate

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

Correction of understated depreciation expense in a prior period.

Roven Company changes from the LIFO method to the FIFO method in 2019. The increase in pre-tax income as a result of the difference in the two methods prior to 2018 is $ 100,000 and for the year 2018 is $40,000 and for the year 2019 is $30,000. The estimated tax effect is 40%. The entry to record the change at the beginning of 2019 should include which of the following? A : A debit to Deferred Tax Liability of $56,000 B : A credit to Deferred Tax Liability of $68,000 C : A debit to Deferred Tax Liability of $68,000 D : A credit to Deferred Tax Liability of $56,000

D : A credit to Deferred Tax Liability of $56,000

A change in accounting principle is evidenced by which of the following? A : a change from replacement cost accounting to the historical cost principle B : a change from the historical cost principle to replacement cost accounting C : adopting the allowance method in estimating bad debts expense when a credit sales policy is instituted D : changing the basis of inventory pricing from weighted-average cost to LIFO

D : changing the basis of inventory pricing from weighted-average cost to LIFO

Which of the following would be the reason a company chooses an accounting method that would have an income-decreasing approach? A : smooth earnings B : bonus payments C : capital structure D : political costs

D : political costs

Which of the following would incorrectly be classified as an impracticable condition for retrospective application? A : retrospective application that requires assumptions about management's intent in a prior period. B : retrospective application that requires significant estimates for a prior period, and the company cannot objectively verify the necessary information to develop these estimates. C : the company cannot determine the effects of retrospective application. D : the company has changed auditors.

D : the company has changed auditors.

On July 1, 2016, Elberta Corp. acquired equipment at a cost of $1,020,000. It is to be depreciated on the straight-line method over a four-year period with no residual value. Because of a bookkeeping error, no depreciation was recognized in Elberta's 2016 financial statements. The oversight was discovered during the preparation of Elberta's 2017 financial statements. Which of the following accounts will not be affected by correcting the error that occurred in 2016, assuming comparative financial statements are not prepared? Retained Earnings. Accumulated Depreciation. Depreciation Expense. All of these accounts will be affected.

Depreciation Expense.

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

Failure to record depreciation.

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

False

Failure to record depreciation expense in a prior year would be accounted for as a prospective change. True False

False

Understating ending inventory will overstate the current year's net income. True False

False

When a company changes from the equity method to the fair value method of accounting for an investment, the cost basis for the investment for accounting purposes will be the fair value of the investment at the date of the change. True False

False

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

False

Which of the following statements related to changes in estimates is not correct? Opening balances are not adjusted for the change. Financial statements of prior periods are not restated. These changes are viewed as normal recurring corrections and adjustments. Pro forma amounts for prior periods are reported.

Pro forma amounts for prior periods are reported.

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

Prospective-effect type.

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. Cumulative. Prior period adjustment. Prospective.

Prospective.

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

Retrospective.

A switch from the cash basis of accounting to the accrual basis is a correction of an error. True False

True

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

True

Inventory errors are counterbalancing errors. True False

True

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

True

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

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

Failure to record depreciation expense in a given year must be accounted for: as a prior period adjustment. currently as an expense adjustment. prospectively. by showing pro forma data.

as a prior period adjustment.

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: all of these answer choices are correct. as a prior period adjustment. using pro forma data. prospectively.

as a prior period adjustment.

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

change in accounting estimate.

Whenever it is impossible to determine whether a change in principle or a change in estimate has occurred, the change should be considered a: counterbalancing error. change in accounting principle. change in estimate. correction of an error.

change in estimate.

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 objectivity. faithful representation. consistency. materiality.

consistency.

All of the following involve counterbalancing errors except the failure to adjust for bad debts. failure to record prepaid expenses. overstatement of purchases. understatement of inventory.

failure to adjust for bad debts.

All of the following involve counterbalancing errors except the: overstatement of ending inventory. failure to record prepaid expenses. failure to record depreciation. understatement of purchases.

failure to record depreciation.

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

not restate prior years' income.

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

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

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: speculative basis. retrospective basis. cumulative basis. prospective basis.

prospective basis.

On December 31, 2017, Paiva, Inc. appropriately changed its inventory valuation method to weighted-average cost from FIFO cost for financial statement purposes. The change will result in a decrease in the inventory account at January 1, 2017. The amount of the change, net of tax is, $1,480,000 (all tax effects should be ignored). The cumulative effect of this accounting change should be reported by Paiva, Inc, in 2017 in the: retained earnings statement as a $1,480,000 addition to the beginning balance. retained earnings statement as a $1,480,000 deduction to the ending balance. income statement as a $1,480,000 cumulative effect of accounting change. retained earnings statement as a $1,480,000 deduction from the beginning balance.

retained earnings statement as a $1,480,000 deduction from the beginning balance.

On December 31, 2017, Dodd, Inc. appropriately changed its inventory valuation method to FIFO cost from weighted-average cost for financial statement purposes. The change will result in an increase in the Inventory account at January 1, 2017. The amount of the change, net of tax is, $2,300,000 (all tax effects should be ignored). The cumulative effect of this accounting change should be reported by Dodd, Inc, in 2017: income statement as a $2,300,000 cumulative effect of accounting change. retained earnings statement as a $2,300,000 deduction from the beginning balance. retained earnings statement as a $2,300,000 addition to the ending balance. retained earnings statement as a $2,3000,000 addition to the beginning balance.

retained earnings statement as a $2,3000,000 addition to the beginning balance.

On January 1, 2017, Columbia Corp. changed its inventory method to FIFO from LIFO for both financial reporting purposes. The change resulted in an increase in the Inventory account. The net of tax amount of the increase was $2,320,000 on January 1, 2017 (all tax effects should be ignored). The cumulative effect of the accounting change should be reported by Columbia in its 2017: retained earnings statement as a $2,320,000 addition to the beginning balance. retained earnings statement as a $2,320,000 deduction from the beginning balance. income statement as a $2,320,000 cumulative effect of accounting change. retained earnings statement as a $2,320,000 addition to the ending balance.

retained earnings statement as a $2,320,000 addition to the beginning balance.

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

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