Chapter 22 Multiple choice

Which of the following is accounted for as a change in accounting principle? A change from the cash basis of accounting to the accrual basis of accounting. A change in the residual value of plant assets. 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 inventory valuation from average cost to LIFO.

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

Asset structure. Capital structure, not asset structure, is another reason why companies prefer certain accounting methods.

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

False Failure to record depreciation expense is considered an accounting error. Correction of an accounting error is treated as a prior period adjustment.

Which of the following statements related to changes in estimates is not correct? Financial statements of prior periods are not restated. Opening balances are not adjusted for the change. Pro forma amounts for prior periods are reported. 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 NOT reported

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? Prospective. Cumulative. Prior period adjustment. Retrospective.

Prospective If assumptions have to be made about management's intent in prior periods, retrospective application is deemed impracticable and the company uses the prospective approach.

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

Prospective-effect type.

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

True

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

True

IFRS and GAAP both require the companies apply the direct effects of changes in accounting policies retrospectively. T F

True

Inventory errors are counterbalancing errors.

True

Presenting consolidated financial statements this year when statements of individual companies were presented last year is

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: prospectively. by showing pro forma data. currently as an expense adjustment. as a prior period adjustment.

as a prior period adjustment. Failure to record depreciation expense in a given year is accounted for as an accounting error. The accounting profession requires that corrections of errors be treated as prior period adjustments.

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

consistency.

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

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

prospective basis. Changes in estimate are considered as normal recurring corrections and adjustments and retrospective adjustment is prohibited. Companies report prospectively changes in accounting estimates.

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 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:

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