Accounting Changes & Error Corrections

Question 1

What type of change is a change of methods of inventory costing?

Answer 1

Change in accounting principle

Question 2

What type of accounting change involves revising an estimate due to new information or experience?

Answer 2

Change in accounting estimate

Question 3

Correcting a mathematical mistake is an example of:

Answer 3

An error correction

Question 4

What is the primary advantage of the retrospective approach in accounting changes?

Answer 4

It achieves comparability among financial statements.

Question 5

When using the retrospective approach, how are retained earnings adjusted?

Answer 5

Retained earnings are adjusted to the beginning balance of the earliest period reported in the comparative statements.

Question 6

What is a potential disadvantage of the retrospective approach?

Answer 6

It may reduce public confidence in the integrity of financial data.

Question 7

What does the modified retrospective approach require in terms of the application of a new standard?

Answer 7

Application of the new standard only to the adoption period.

Question 8

How are cumulative effects of prior periods captured in the modified retrospective approach?

Answer 8

By adjusting the balance of retained earnings at the beginning of the adoption period.

Question 9

Under to prospective approach, how are the effects of a change reflected in the financial statements?

Answer 9

In the financial statements of only the year of the change and future years.

Question 10

The following statement is true regarding what approach?
“Changes are implemented in the period of the change and future periods only.”

Answer 10

Prospective Approach

Question 11

Under the prospective approach, how are prior period financial statements affected?

Answer 11

They remain unchanged.

Question 12

What is NOT required by the prospective approach?

Answer 12

Modification of prior years’ financial statements.

Question 13

What is the process of allocating the cost of a tangible asset over its useful life?

Answer 13

Depreciation

Question 14

When a company changes its depreciation method, how is this change reported?

Answer 14

As a change in estimate (prospectively)

Question 15

Which depreciation method might a company use if it expects greater benefits in the earlier years of an asset’s life?

Answer 15

Accelerated Depreciation

Question 16

When a company acquires another company, how are the financial statements of the acquirer affected?

Answer 16

The acquirer’s financial statements include the acquiree as of the date of acquisition.

Question 17

What must be included in the financial statements when there is a change in reporting entity?

Answer 17

A restatement of prior period financial statements to reflect the new entity.

Question 18

How are previous years financial statements corrected when an error is identified?

Answer 18

They are retrospectively restated.

Question 19

When correcting an error that affects retained earnings, how is the correction reported?

Answer 19

As an adjustment to the beginning balance in a statement of shareholder’s equity.

Question 20

Which approach is used for the correction of errors?

Answer 20

Retrospective Approach

Question 21

What is a prior period adjustment?

Answer 21

An addition to or reduction in the beginning retained earnings balance

Question 22

What is an example of an error that does not affect net income?

Answer 22

Recording salaries payable as accounts payable.