FINA 470: Chapter 5 Smartbook

Which of the following is considered a change in accounting principle? Multiple choice question. A firm increasing the estimated service life of machinery. A firm adding a subsidiary not previously included in prior years' consolidated financial statements. A firm correcting an error discovered from a previous accounting period. A firm switching from the LIFO to the FIFO method of valuing inventory.

A firm switching from the LIFO to the FIFO method of valuing inventory.

Change in accounting principle

Adoption of the new FASB standard on revenue recognition.

A prior-period adjustment includes which of the following? Multiple select question. An addition to or subtraction from expenses in the current year. An addition to or subtraction from beginning Retained earnings. Correction of the appropriate asset or liability balances. An addition to or subtraction from revenues in the current year.

An addition to or subtraction from beginning Retained earnings. Correction of the appropriate asset or liability balances.

Which of the following is needed when an error is so significant that investors must be alerted when the error is discovered that they should no longer rely on the previously issued financial statements? Multiple select question. Little r Revision Restatement Big R Reissuance Restatement

Big R Reissuance Restatement

Change in accounting estimate

Change in depreciation method.

Select all that apply Which of the following are considered a changes in accounting estimate? Multiple select question. Change in the salvage value of machinery. Change in the percentage of uncollectible accounts. Adding a subsidiary not previously included in consolidated financial statements. Change from the LIFO to the FIFO method of valuing inventory.

Change in the salvage value of machinery. Change in the percentage of uncollectible accounts.

Select all that apply Common non-GAAP metrics include Multiple select question. Earnings before restructuring charges. Gross profit. EBITDA. Depreciation expense.

EBITDA Earnings before restructuring charges.

True or false: A subsequent event occurs before the close of a firm's fiscal year-end but after the financial statements are issued. True False

False

True or false: Accounting errors and irregularities are always a result of outright fraud. True False

False

True or false: In general, U.S. GAAP requires that firms use the cumulative effect approach to account for changes in accounting principles. True False

False

Which of the following contributed to the drastic jump in financial statement restatements that took place in 2005 and 2006? Multiple select question. Improved trust in corporate officers. Leases and stock options backdating. Internal control provisions under SOX Section 404. Record levels of income and dividends.

Leases and stock options backdating. Internal control provisions under SOX Section 404.

Which of the following is needed when an error is not so significant that it renders previously issued financial statements unreliable? Multiple select question. Big R Reissuance Restatement Little r Revision Restatement

Little r Revision Restatement

Change in reporting entity

Reporting consolidated financial statements in place of individual financial statements.

Select all that apply Which of the following are true regarding restatements after 2006? Multiple select question. Restatements declined in frequency after 2006. Restatements increased in severity after 2006. Restatements declined in severity after 2006. Restatements increased in frequency after 2006.

Restatements declined in frequency after 2006. Restatements declined in severity after 2006.

Which of the following requires registrants to make disclosures about the expected financial statement effects of recently issued accounting standards that have not yet been adopted? Multiple choice question. IRS SEC GASB IFRS

SEC

Which of the following explains the important accounting choices the reporting entity uses to account for selected transactions and accounts? Multiple choice question. Summary of Significant Accounting Policies Disclosure of Important Subsequent Events Disclosure of Related-Party Transactions

Summary of Significant Accounting Policies

Select all that apply The cumulative effect of an accounting principle change is the difference between which two of the following? Multiple select question. What cumulative earnings will be in the upcoming three years. The cumulative earnings previously reported under the old method. What cumulative earnings would have been in all prior years if the new method had always been used. What cumulative earnings would have been in the one year immediately preceding the change.

The cumulative earnings previously reported under the old method. What cumulative earnings would have been in all prior years if the new method had always been used.

Which of the following will require the disclosure of subsequent events? Multiple choice question. The subsequent event is immaterial and likely to influence investors' appraisal of the risk and return prospects of the reporting entity. The subsequent event is material and likely to influence investors' appraisal of the risk and return prospects of the reporting entity. The subsequent event is material but unlikely to influence investors' appraisal of the risk and return prospects of the reporting entity. The subsequent event is material or likely to influence investors' appraisal of the risk and return prospects of the reporting entity.

The subsequent event is material and likely to influence investors' appraisal of the risk and return prospects of the reporting entity.

Which of the following are true of changes in accounting estimates? Multiple select question. The income effects are accounted for using the retrospective approach. They are a result of new information indicating that previous estimates are no longer valid. Prior-year income is never adjusted. If the change has a material effect, the dollar amount of the effect must be disclosed.

They are a result of new information indicating that previous estimates are no longer valid. Prior-year income is never adjusted. If the change has a material effect, the dollar amount of the effect must be disclosed.

Which of the following are examples of related-party transactions? Multiple select question. Transactions made at arm's-length. Transactions between the reporting entity and members of its board of directors. Transactions between subsidiaries of a common parent. Transactions between the reporting entity and suppliers located in the same city.

Transactions between the reporting entity and members of its board of directors. Transactions between subsidiaries of a common parent.

Under which of the following circumstances is it impracticable to apply a change in accounting principle retrospectively? Multiple choice question. When the firm makes changes midyear. When the retroactive effect would not reflect the firm in a positive light. When the retroactive effect is indeterminable.

When the retroactive effect is indeterminable.

Based on new information, a firm changes from the straight-line method of depreciation to double-declining balance method. This change will be accounted for as Multiple choice question. an accounting error. a change in accounting estimate. a change in reporting entity. a change in accounting principle.

a change in accounting estimate.

A change in accounting principle occurs when Multiple choice question. a firm voluntarily changes from one generally accepted accounting principle to another. a firm revises an estimate because of new information or new experience. a firm has a change in the economic units that make up the reporting agency.

a firm voluntarily changes from one generally accepted accounting principle to another.

Under the retrospective approach to accounting for changes in accounting principles, Multiple select question. a journal is made to adjust the firm's Retained earnings balance to reflect the cumulative effect of the accounting principle change. prior years' financial statements are revised to reflect the impact of the new accounting principle change. only the current year and future financial statements are revised to reflect the impact of the accounting principle change. a journal entry is made to adjust all balance sheets accounts to what they would have been if the new method had always been used. a journal entry is made to adjust asset accounts to what their balances would have been had the new method been used in the current year

a journal is made to adjust the firm's Retained earnings balance to reflect the cumulative effect of the accounting principle change. prior years' financial statements are revised to reflect the impact of the new accounting principle change. a journal entry is made to adjust all balance sheets accounts to what they would have been if the new method had always been used.

Select all that apply The cumulative effect approach is allowed when there is a change in accounting principle if Multiple select question. all prior-period financial statements are restated. it would result in a more positive bottom line for the firm. a particular standard specifies that it be used. retrospective restatement is not practicable.

a particular standard specifies that it be used. retrospective restatement is not practicable.

Changes in accounting estimates that result from a change in accounting principle are Multiple choice question. prohibited in U.S. GAAP. accounted for as an error. accounted for as a change in principle. accounted for as a change in estimate.

accounted for as a change in estimate.

Select all that apply Consistency in the application of accounting standards is not always possible because Multiple select question. firms are required to annually revise estimates used to compute net income. accounting standards-setting bodies issue new standards requiring companies to change accounting methods. firms can voluntarily switch accounting methods. firms can voluntarily revise estimates used to compute net income. accounting standards-setting bodies prohibit companies from changing accounting methods.

accounting standards-setting bodies issue new standards requiring companies to change accounting methods. firms can voluntarily switch accounting methods. firms can voluntarily revise estimates used to compute net income.

A business combination accounted for under the ______ method is specifically excluded from the definition of a change in reporting entity. Multiple choice question. purchase retroactive pooling-of-interests acquisition

acquisition

Decreasing the salvage value of equipment from $50,000 to $35,000 is a(n) __. Multiple choice question. change in accounting estimate change in reporting entity change in accounting principle error correction

change in accounting estimate

Accounting changes include Multiple select question. change in accounting principle. change in accounting estimate. change in reporting entity. an error correction.

change in accounting principle. change in accounting estimate. change in reporting entity.

Using the same accounting methods to describe similar economic events from period to period is referred to as __________.

consistency

The SEC staff is charged with Multiple choice question. ensuring compliance with the Commission's accounting and disclosure requirements. auditing the financial statements to ensure they are fairly presented in all material respects in accordance with GAAP. overseeing the preparation of the financial statements and ensuring they fairly depict the company's financial condition and results of operation. evaluating internal controls.

ensuring compliance with the Commission's accounting and disclosure requirements.

Select all that apply A company's internal audit staff and audit committee are charged with Multiple select question. ensuring compliance with SEC accounting and disclosure requirements. auditing the financial statements to ensure that they are fairly presented in all material respects in accordance with GAAP. evaluating internal controls. overseeing the preparation of the financial statements. ensuring that the financial statements fairly depict the company's financial condition and results of operations.

evaluating internal controls. overseeing the preparation of the financial statements. ensuring that the financial statements fairly depict the company's financial condition and results of operations.

Select all that apply The Summary of Significant Accounting Policies Multiple select question. explains the important accounting choices the reporting entity uses to account for selected transactions and accounts. discloses significant events or transactions that occur after the close of the fiscal year but before the financial statements are issued. discloses related-party transactions. improves financial statement users' ability to make valid intercompany comparisons.

explains the important accounting choices the reporting entity uses to account for selected transactions and accounts. improves financial statement users' ability to make valid intercompany comparisons.

If a firm wishes to change their inventory valuation method but does not have the detailed records needed to retroactively restate prior periods' results, Multiple choice question. the firm should estimate the results and apply the change retrospectively. the firm cannot change their inventory valuation method. it is impracticable to apply a change in accounting principle retrospectively.

it is impracticable to apply a change in accounting principle retrospectively.

A prior-period adjustment is used to correct Multiple choice question. material errors discovered in the year in which the error is made. immaterial errors discovered in the year in which the error is made. material errors discovered after the year in which the error is made. immaterial errors discovered after the year in which the error is made.

material errors discovered after the year in which the error is made.

Select all that apply A change in reporting entity Multiple select question. occurs when the entities comprised by the financial statements changes. includes a business combination accounted for under the acquisition method. requires that comparative financial statements for prior years be restated. requires that comparative financial statements be restated going forward but not restated for prior years.

occurs when the entities comprised by the financial statements changes. requires that comparative financial statements for prior years be restated.

The income effects of a changed estimate are accounted for in the period of the change and/or in future periods under the _________________ approach.

prospective

A ____________-_____________ transaction occurs when a reporting entity enters into a transaction with individuals or other business that are in some way connect with it or its management or board of directors.

related-party

Select all that apply Accounting errors or irregularities occur because of Multiple select question. a change in estimate for uncollectible accounts. simple oversight. a change from the LIFO method to the FIFO method of valuing inventories. a misapplicaton of GAAP.

simple oversight. a misapplicaton of GAAP.

Select all that apply Under the cumulative effect approach Multiple select question. successive financial statements will always have been prepared under the same accounting methods. all prior-period financial statements are restated to as if the new method had always been used. the balance sheet as of the first day of the year the new standard is adopted is adjusted. no prior-period financial statements are restated.

the balance sheet as of the first day of the year the new standard is adopted is adjusted. no prior-period financial statements are restated.

Non-GAAP metrics are allowed provided Multiple select question. they are not misleading. they exclude normal, recurring cash expenses from the definition of income. they are given greater prominence than GAAP disclosures. any non-GAAP metric is accompanied by a reconciliation to the closest comparable GAAP metric. they are not given greater prominence than GAAP disclosures.

they are not misleading. any non-GAAP metric is accompanied by a reconciliation to the closest comparable GAAP metric. they are not given greater prominence than GAAP disclosures.

The SEC disclosure requirements of the expected financial statement effects of recently issued accounting standards are useful to analysts because Multiple choice question. they provide information that allows forecasts to be compared to historical numbers produced using different accounting methods. they provide information that prevents insider trading. they provide information that allows forecasts to be compared to historical numbers produced using the same accounting methods.

they provide information that allows forecasts to be compared to historical numbers produced using the same accounting methods.