16 Accounting Changes and Error Corrections

Question 1

If an inventory error is discovered in year 3, what is the impact on retained earnings?

Answer 1

There is no impact on retained earnings; the error has self-corrected.

Question 2

If an inventory error is discovered in year 2, where is the difference recorded?

Answer 2

In the beginning balance of retained earnings

Question 3

What accounting change is often impracticable to compute a cumulative effect?

Answer 3

Change to last in first out (LIFO)

Question 4

What accounting approach is applied to estimate changes?

Answer 4

Prospective

Question 5

What accounting approach is applied to principle changes?

Answer 5

Retrospective

Question 6

List the two accounting approaches for recording accounting changes.

Answer 6

1. Retrospective
2. Prospective

Question 7

How is a change in method that is indistinguishable from a change in estimate accounted for?

Answer 7

Change in estimate

Question 8

What is a change in accounting principle?

Answer 8

A change from one generally accepted accounting principle to another when there are at least two acceptable principles or when the current principle used is no longer generally accepted.

Question 9

What is the date of application used by firms for accounting changes?

Answer 9

First day of the year of change

Question 10

List the three types of accounting changes.

Answer 10

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

Question 11

What account records the effect of principle change on prior years?

Answer 11

Retained earnings

Question 12

What type of changes and events are comparative financial statements of prior periods changed for?

Answer 12

Accounting principle changes
Error corrections

Question 13

What is the first computation in accounting for an estimate change involving a depletable resource?

Answer 13

Compute book value at the beginning of the year of change.

Question 14

How is a change in depletion method accounted for?

Answer 14

Prospective approach (same as estimate change)

Question 15

What is the most frequent type of accounting change?

Answer 15

Estimate change

Question 16

What accounting approach is used for a change in reporting entity?

Answer 16

Retrospective method

Question 17

What accounting approach is applied to changes in depreciation method?

Answer 17

Prospective

Question 18

What is the amount recorded for the change in deferred taxes for a change in accounting principle?

Answer 18

The pretax cumulative effect multiplied by the tax rate

Question 19

What account is debited when an accounting principle change causes income in prior years to decrease?

Answer 19

Retained earnings (cumulative effect of change)

Question 20

What accounting approach is applied to error corrections?

Answer 20

Retrospective (restatement)

Question 21

What accounting approach is applied to corrections of errors affecting prior-year net income?

Answer 21

Retrospective

Question 22

What is the change in retained earnings for an error correction called?

Answer 22

Prior-period adjustment

Question 23

In year 1 of an error, if purchases are understated, what is the impact on retained earnings?

Answer 23

The impact on retained earnings is overstated.

Question 24

Where and how are prior-period adjustments shown?

Answer 24

They are shown on the statement of retained earnings as adjustments to the beginning balance of retained earnings in the year that the error is discovered.

Question 25

What is the difference between errors and irregularities?

Answer 25

Errors are unintentional. Irregularities are intentional.

Question 26

What financial statement errors will remain if an error counterbalances?

Answer 26

All account balances affected by the error are still erroneous, except for retained earnings.

Question 27

How many years should be considered in the journal entry to correct retained earnings?

Answer 27

All years affected by the error through the beginning of the year of change

Question 28

How many years should be considered when computing the adjustment to the earliest year in the retained earnings statement?

Answer 28

All years before the earliest year in the statement affected by the error

Question 29

What is the rationale for applying the prospective method to estimate changes?

Answer 29

The new information triggering the change is not applicable to prior years.