Accounting Changes & Error

Question 1

What type of change is reflected prospectively?

Answer 1

Estimate changes

Question 2

What type of change is reflected retrospectively?

Answer 2

Accounting principle changes and correction of errors in prior income

Question 3

How is the retrospective application recorded?

Answer 3

The change in prior years is recorded in current year’s beginning retained earnings AND prior financial statements are restated (only the prior comparative statements)

Question 4

What are the two accounting approaches to reports accounting changes and errors?

Answer 4

Prospective and Retrospective

Question 5

Where are changes in accounting estimates reported?

Answer 5

Income from continuing operations

Question 6

True or False: the change from LIFO generally does not require a cumulative effect to be reported

Answer 6

False

Question 7

True or False: the change to LIFO generally requires a cumulative effect to be reported

Answer 7

False

Question 8

True or False: Double Declining Method does not take into consideration Salvage Value

Answer 8

True

Question 9

True or False: The original useful life of an asset was 10 years. In the asset’s fourth year, the total useful life was changed to seven years. Depreciation in the fifth year will use four years in the denominator of the straight-line calculation for depreciation.

Answer 9

True

Question 10

How are indirect effects of accounting principles accounted for under US GAAP vs IFRS?

Answer 10

GAAP: retrospectively
IFRS: no specific guidelines

Question 11

What is a PPA (Prior Period Adjustment)?

Answer 11

A PPA is an adjustment to the beginning retained earnings balance that corrects the effect on retained earnings of errors in reporting prior-year income.

A PPA is not a voluntary accounting change unlike the change in accounting principle and change in estimate