Ch 22 MC

A company that reports changes retrospectively would:

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

3 types of accounting changes

1. change from lifo to fifo 2. change in reporting entity 3. change in the estimated useful life of an asset

Which of the following is NOT considered a direct effect of a change in an accounting principle?

An employee profit sharing plan based on net income when a company uses the percentage-of-completion method. (its an indirect effect)

NOT a reason why companies prefer certain accounting methods?

Asset structure

Which type of accounting change is accounted for in current and future periods?

Change in accounting estimate

Which of the following financial stmt characteristics is adversely affected by accounting changes?

Consistency

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 and comparability

Which of the following is NOT one of the 3 types of accounting changes?

Correction of understated depreciation

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

FALSE

FASB takes the position that companies should retrospectively apply the indirect effects of a change in accounting principle. T or F

FALSE. FASB takes the position that they should not change prior period amounts for indirect effects

If the previously used accounting principle was NOT acceptable, a change to a generally accepted accounting principle is considered a change in principle. T or F

FALSE. considered a correction of an error.

Company X changed its inventory method to LIFO inventory valuation from FIFO. If it is impracticable to retrospectively apply the new method, Company X should....

Not restate prior years' income

Which of the following statements related to changes in estimates is not correct?

Pro forma amounts for prior periods are reported

At 12/31/17, company estimated bad debts as 3% of the outstanding balance of Accounts Receivable. 12/31/18, company determined that it should increase its estimate to 6.5%. This change is handled on a:

Prospective basis

Changes in estimates must be accounted for

Prospectively

Company experienced a change in acctg principle where opening balances were NOT adjusted and no attempt was made to allocated charges or credits for prior events. this method of recording an acctg change is known as handling the change:

Prospectively

a change from lifo inventory valuation to another inventory valuation method is an example of a:

Retrospective-effect type of accounting change

A change from an acctg principle that is NOT generally accepted to an acctg principle that is acceptable should be treated as an accounting error. T or F

T

A change in acctg principle results when a company changes from one GAAP to another GAAP. T or F

T

Accounting alternatives diminished the comparability of financial information between periods & between companies. They also obscure useful historical trend data. T or F

T

An understatement in ending inventory will result in a corresponding understatement of net income. T or F.

T

Changes in estimates must be handled prospectively T or F

T

If a counterbalancing error is discovered after the books are closed in the 2nd yr, no correcting entry is needed. T or F.

T

If accrued wages are overlooked at the end of the accounting period, expenses & liabilities will be understated and the net income will be overstated. T or F.

T

If it becomes impracticable to use retrospective application for a change in accounting principle, a company should prospectively apply the new acctg principle T or F

T

When a company changes an acctg principle under the retrospective approach it adjusts its financial stmts for each prior period presented. T or F

T

When a company makes changes that result in different reporting entities, the company should report the change by changing the fin stmts of all prior periods presented and the revised stmts should show the financial info for the new reporting entity for all periods. T or F

T

Whenever it is impossible to determine whether a change in principle or a change in estimate has occurred, the change should be considered a change in estimate. T or F

T

Change from equity method to fair value method, the cost basis for accounting purposes is?

The carrying value of the investment at the date of the change

Which of the following is a condition in which retrospective application is NOT impracticable?

The company has changed auditors

All of the following are examples of a change in accounting principle except a change from:

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

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

True

Inventory errors are counterbalancing errors:

True (they'll correct themselves within 2 yrs)

Which of the following is NOT a change in accounting principle?

Using a different method of depreciation for new plant assets

The general rule for differentiating between a change in an estimate and a correction of an error is:

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

An overstatement of ending inventory and an understatement of depreciation expense will both cause:

an overstatement in income (so add both to calculate amount overstated by)

Which of the following is a reason why companies prefer certain accounting methods?

bonus payments

A change that occurs as the result of new info or as additional experienced acquired is a:

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:

change in estimate

Changing specific subsidiaries that constitute the group of companies for which consolidated financial stmts are prepared is an example of a.....?

change in reporting entity

Company X has a change in accounting that requires them to restate their financial stmts of all prior periods presented and disclose in the yr of change the effect on NI and EPS data for all prior periods presented. this change is most likely the result of a:

change in reporting entity.

A change in accounting principle is evidenced by:

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

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 earliest year presented

A change to LIFO inventory valuation from any other acceptable inventory valuation method

requires no restatement of prior yr's net income

Ending inventory understatement and advertising expense overstatement:

results in a combined understatement of income

12/31/17, company changed its inventory valuation method to FIFO cost from weighted average cost. for F/S purposes. The change will result in an increase in the inventory account 1/1/17. The amount of the change is 2.3 mil. The cumulative effect of this accounting change should be reported by company in 2017:

retained earnings statement as a 2.3 mil addition to the beginning balance

Company X has accounted for inventory using NIFO the past 2 yrs. during the current year they changed to FIFO. the effect of this change should be reported in the current:

retained earnings stmt as an adjustment of the opening balance. its a correction of an error and handled as prior period adjustment.

According to FASB which approach is required for reporting changes in an accounting principle?

retrospectively

Instituting a policy whereby customers can now purchase merchandise on account, when in the past only cash sales were accepted, is evidence that a change in accounting principle has occurred T or F

FALSE. Not a change in accounting principle

Example of a counterbalancing error?

Failure to record accrued wages

Which of the following is NOT a part of applying the current and prospective approach in accounting for a change in an estimate?

Restating prior period financial statements (its a part of the application of the retrospective approach)

A change in accounting principle should be accounted for...

Retrospectively

Reasons why companies prefer certain methods:

bonus pmts, political costs, smooth earnings

Which of the following is an example of a change in reporting entity?

-Presenting consolidated statements in place of statements for individual companies. -Changing the companies included in combined financial statements. -Changing specific subsidiaries that constitute the group of companies for which the entity presents consolidated financial statements

Examples of a change in Accounting Principle:

-average cost to LIFO inventory pricing -FIFO to average cost inventory pricing -the completed-contract to percentage-of-completion method of accounting for construction contracts

Changes in estimates:

-changes in depreciation methods -change in accounting estimate -change in estimated recoverable mineral reserves

Which of the following statements related to changes in estimates is correct?

-financial stmts of prior periods are not restated -these changes are viewed as normal recurring corrections and adjustments -opening balances are not adjusted for the changes

Which of the following is a part of applying the current and prospective approach in accounting for a change in an estimate?

-report current & future financial stmts on a new basis -disclose in the yr of change the effect on NI & earnings per share data for that period only -make no adjustments to current period opening balances for purposes of catch-up (all applied to as a change in an estimate)

Which of the following makes retrospective approach impracticable?

-the company cannot determine the effects of retrospective application -retrospective application requires assumptions about mgmt.'s intent in a prior period -retrospective application requires significant estimates for a prior period, & the company cannot objectively verify the necessary info to develop these estimates.

Which of the following is considered a direct effect of a change in accounting principle?

-the inventory balance as a result of a change in the inventory valuation method -an impairment adjustment resulting from applying the lower of cost or market test to the adjusted inventory balance -deferred income tax effects of an impairment adjustment resulting from applying the lower of cost or market test to the adjusted inventory balance

FASB requires companies to use the prospective ( in the future) approach for reporting changes in accounting principle.

FALSE. Fast requires retrospective approach

Companies should use retrospective application if the company cannot determine the effects of the retrospective application. T or F.

FALSE. They should not use it.

If a change in an acctg estimate affects current net income by an amount = or greater than 1% of net income, the change should be handled retrospectively. T or F

FALSE. changes in acctg estimate must be handled prospectively, no changes should be made in previously reported results. opening balances aren't adjusted and no attempt is made to catch up for prior periods.

When a company changes an acct principle is should NOT adjust any assets or liabs. T or F.

FALSE. it adjusts the carrying amts of assets and liabs as of the beginning of the 1st yr presented.

A change in accounting principle results when a company adopts a new principle in recognition of events that were previously immaterial T or F

FALSE. its not an accounting change

When its impossible to differentiate btwn a change in estimate and correction of an error, companies should consider careful estimates that later prove to be incorrect as a correction of an error. T or F

FALSE. prove to be incorrect as a change in estimate, not as a correction of an error.

GAAP requires that corrections of errors be handled prospectively and shown in the current operating section of the income stmt in the yr the correction is made. T or F

FALSE. should be treated as prior period adjustments

Counterbalancing errors are 2 separate errors that offset one another in the same acttg period. T or F

FALSE. they are errors that will offset or correct themselves over 2 periods. example: failure to record accrued wages in period 1 causes: -net income to be overstated -accrued wages payable to be understated -wages expense to be understated

Not a counterbalancing error?

Failure to record depreciation

Which of the following is NOT a counterbalancing error?

Failure to record depreciation (errors that are not offset in the next accounting period)

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. T or F

False (the cost basis for the investment for accounting purposes will be the carrying value)

Regarding changes in accounting principles, direct effects do not change prior period amounts T or F

False. indirect effects don't change

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

False. it is considered an accounting error and is treated as a prior period adjustment.

Understating ending inventory will overstate the current years net income:

False. it will understate the current years net income

Recording the purchase of land as an expense is an example of a non counterbalancing error. T or F.

T

When a company changes an accounting principle, one of the disclosure requirements is to show the cumulative effect of the change on rtd earnings as of the beg of the earliest period presented T or F

T