ACCT Ch 20 LS

If it is impractible to adjust each year for the effect of a voluntary accounting principle change, the change is applied

Retrospectively to the earliest year practicable

Match each item with its definition: Change in accounting estimate

Revision of an amount due to new information or new experience

When financial statements are revised to reflect the impact of a change in accounting principle, the __ approach is used

Retrospective

The basic requirement of IFRS No. 1 for a company's first IFRS-based financial statements is to present the change

Retrospectively

Which of the following are considered a change in accounting principle

*Adopt a new FASB standard *Change from the cost of equity method

For US GAAP, which of the following are considered accounting changes

*Change in accounting estimate *Change in reporting entity *Change in accounting principle

Retrospective application for a change in accounting principle requires that

An adjustment is made to RE for the earliest period presented

An exception to the retrospective application of voluntary changes in accounting principles is when

Authoritative literature requires prospective application for a change in accounting methods

The rationale for a change in depreciation method to be treated as a change in accounting estimate is that

Changing depreciation method is done to reflect changes in estimated future benefits

Rex Corp. purchased supplies on account and recorded it in the inventory account. What is the journal entry to correct this error

Debit supplies; credit inventory

When an accounting change is made, what disclosures are necessary in the notes to the financial statements

Justification for the new method

An error in which of the following accounts typically does not self correct

Land

When a new accounting standard is applied to the adoption period and an adjustment is made to the balance of RE at the beginning of the adoption period, the __ approach is used

Modified retrospective

A voluntary accounting change can be made only if it is justified as being __ to the previous method

Preferable

An addition to or reduction of the beginning balance of RE is referred to as a(n) __ __ adjustment.

Prior period

A change in accounting estimate is accounted for using the __ approach

Prospective

If it is impractible to measure the period-specific effects of change in accounting principle, what approach is used

Prospective

Match each situation with the correct accounting application: Change in accounting estimate

Prospective application

Events that cause changes in RE are reported in the

Statement of RE

True or False. A prior period adjustment requires an adjustment to the beginning balance of retained earnings for the year following the error or for the earliest year being reported in the comparative financial statements if the error occured prior to the earliest year presented.

True

"Cookie jar" accounting involves

Using unrealistic estimates to create reserves to smooth earnings

The selection of an accounting method is important because it can

*Influence financial ratios *Complicate comparisons *Reduce comparability

If Allegan miscounts ending inventory in the current year, which of the following amounts will be incorrect on its financial statements

*Inventory *Cost of goods sold *Net income

The retrospective approach to accounting changes supports which principles or concepts

*Comparability *Consistency

If a company changes its inventory method, what financial statement accounts are affected

*Cost of goods sold *Inventory

Grls Corp. purchases inventory on account and incorrectly records a debit to equipment and a credit to cash. Which entries would be used to reverse and correct this error

*Debit cash; credit equipment *Debit inventory; credit accounts payable

Error correction requires disclosure of the

*Effect of its correction on operations *Nature of the error

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

*Failing to record a transaction *Mathematical mistakes *Change from the cash basis of accounting to accrual basis

Which of the following errors would self-correct in the following year

*Miscounting ending inventory *Failure to accrue salaries in the current year

What factors strongly contribute to the need for changes in estimates

*New information becomes available *Experience relating to the estimates

An accountant discovers an error in the current year accounting records. What are the appropriate actions the accountant should take

*Prepare the correct journal entry for the transaction *Reverse the incorrect entry

Which of the following are requirements for the correction of an accounting error

*Report a prior period adjustment to the beginning balance in RE for the earliest year affected *Prepare a journal entry to correct the error

Which of the following is a change in accounting estimate acheived by a change in accounting principle

Change in depreciation methods

If a change in accounting principle does not required additional taxes to be paid or taxes to be refunded, which account is used to record the tax effects of a change in accounting principle

Deferred tax asset or liability accounts

When it is impossible to distinguish between a change in principle and a change in estimate, the change should be treated as a change in

Estimate

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 RE for the earliest year presented for the years prior to that date

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

No change is made to previous years' financial statements

What approach is used to account for a change in depreciation method

Prospective approach

Which of the following is a change in accounting estimate

Change in accrual calculations pertaining to pension plan

In year 2, Rossman Corp. changed its inventory method from FIFO to the weighted average method. The change resulted in a decrease in beginning inventory for year 2 of $10,000. What were the income statement effects of this change

Earnings per share for year 1 decreased

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

Error correction

A change in reporting entity requires

Financial statements of prior periods to be revised retrospectively

After a recent acquisition, Joann Inc. issues consolidated financial statements for the first time. Joann should report the acquisition as a change in

Reporting entity

What is the approach used for an error correction

Restatement of previous years' financial statements

Which of the following represents a situation for which it may be difficult to distinguish between an estimate and a principle change

The costs of tools are capitalized instead of expensed

Match each item with its definition: Change in accounting principle

Change from one generally accepted method to another generally accepted method of accounting

Which of the following should be included in the disclosure for a change in reporting entity

*The effect of the change on net income *The reason for the change *The nature of the change

The issues that a US GAAP based company that adopts IFRS for the first time would have to consider would include

*Reporting some assets and liabilities under IFRS that are not reported under US GAAP *Explaining in the financial statement notes how to transition to IFRS affects the financial statements *Reclassify some items on the financial statements

Which of the following are acceptable reasons for an accounting change

*To be consistent with others in the industry *To apply a new method that is more appropriate

Match each situation with the correct accounting application: Accounting error

Restatement of financial statements

A reporting entity can consist of

Either a single or a group of companies

When is the prospective approach used in accounting changes

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

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

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

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

*Increasing income *Smoothing income *Decreasing income

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

*RE is adjusted for the earliest period presented *The adjusted net income for each year is shown on the RE statement for that year

True or False. Because of the convergence efforts by FASB and IASB, few differences remain between US GAAP and IFRS with respect to accounting changes and error correction

True