[THEORY] ACCOUNTING CHANGES

Question 1

How should the effect of a change in accounting estimate be accounted for?

a. By restating amounts reported in prior periods
b. By reporting proforma amounts for prior periods
c. As a prior period adjustment of retained earnings
d. In the period of change and future periods if the change affects both

Answer 1

ANS: d. In the period of change and future periods if the change affects both

Question 2

Which is characteristic of a change in accounting estimate?

a. It usually need not be disclosed
b. It does not affect the financial statements of prior periods
c. It should be reported through the restatement of the financial statements
d. It makes necessary the reporting of proforma amounts

Answer 2

ANS: b. It does not affect the financial statements of prior periods

Question 3

A change in the periods benefited by a deferred cost because additional information has been obtained is

a. An accounting change reported in the period of change and future periods if the change affects both
b. An accounting change that should be reported by restating the financial statements of all prior periods presented
c. A correction of an error
d. Not an accounting change

Answer 3

ANS: a. An accounting change reported in the period of change and future periods if the change affects both

Question 4

A change in the residual value of an asset arising because additional information has been obtained is

a. An accounting change reported in the period of change and future periods if the change affects both
b. An accounting change that should be reported by restating the financial statements of all prior periods presented
c. A correction of an error
d. Not an accounting change

Answer 4

ANS: a. An accounting change reported in the period of change and future periods if the change affects both

Question 5

Which should be reported when an entity changed from straight-line depreciation to double-declining?

a. Cumulative effect of change in accounting policy
b. Proforma effect of retroactive application
c. Prior period error
d. An accounting change that should be reported currently and prospectively
ANS: d. An accounting change that should be reported currently and prospectively

Question 6

Which is NOT a justification for a change in depreciation method?

a. A change in the estimated useful life
b. A change in the pattern of the estimated future benefit
c. To conform with the depreciation method prevalent in a particular industry
d. A change in the estimated future benefit
ANS: c. To conform with the depreciation method prevalent in a particular industry

Question 7

Which is the best explanation why accounting changes are classified into accounting policy and accounting estimate?

a. The materiality of the change
b. Each change involves a different method of recognition in the financial statements
c. The fact that some treatments are considered GAAP
d. The need to provide a favorable profit picture
ANS: b. Each change involves a different method of recognition in the financial statements

Question 8

Which is NOT classified as an accounting change?

a. Change in accounting policy
b. Change in accounting estimate
c. Error in the financial statements
d. All of these are classified as an accounting change
ANS: c. Error in the financial statements

Question 9

Which of the following is the proper time period to record the effect of a change in accounting estimate?

a. Current period and prospectively
b. Current period and retrospectively
c. Retrospectively
d. Current period
ANS: a. Current period and prospectively

Question 10

Why is retrospective treatment of a change in accounting estimate prohibited?

a. A change in accounting estimate is a normal recurring correction or adjustment.
b. The retrospective treatment is not allowed.
c. Retrospective treatment of a change in accounting estimate is required by IFRS.
d. IFRS does not prohibit retrospective treatment of a change in accounting estimate.
ANS: a. A change in accounting estimate is a normal recurring correction or adjustment.

Question 11

Which of the following is required for a change from the sum-of-years’-digits to the straight-line method of depreciation?

a. The cumulative effect on prior years is reported in the statement of retained earnings.
b. Retrospective restatement.
c. Recomputation of depreciation for current and future years.
d. All of these are required.
ANS: c. Recomputation of depreciation for current and future years.

Question 12

Which of the following is NOT a justification for a change in depreciation method?

a. A change in the estimated useful life.
b. A change in the pattern of estimated future benefit.
c. To conform with the depreciation method prevalent in a particular industry.
d. A change in the future benefit from the asset.
ANS: c. To conform with the depreciation method prevalent in a particular industry.

Question 13

Which is the first step within the hierarchy of guidance when selecting accounting policies?

a. Apply a standard from IFRS if it specifically relates to the transaction.
b. Apply the requirements in IFRS dealing with similar and related issues.
c. Consider the applicability of the concepts in the Conceptual Framework.
d. Consider the most recent pronouncements of other standard-setting bodies.
ANS: a. Apply a standard from IFRS if it specifically relates to the transaction.

Question 14

In the absence of an accounting standard that applies specifically to a transaction, what is the most authoritative source in developing and applying an accounting policy?

a. The requirement and guidance in the standard or interpretation dealing with similar and related issues.
b. The definition, recognition criteria, and measurement of elements in the Conceptual Framework.
c. Recent pronouncements of other standard-setting bodies.
d. Accounting literature and accepted industry practice.
ANS: a. The requirement and guidance in the standard or interpretation dealing with similar and related issues.

Question 15

Why is an entity permitted to change an accounting policy?

a. The change would allow the entity to present a more favorable profit picture.
b. The change would result in providing more reliable and relevant information about financial position, financial performance, and cash flows.
c. The change is made by the internal auditor.
d. The change is made by the independent CPA.
ANS: b. The change would result in providing more reliable and relevant information about financial position, financial performance, and cash flows.

Question 16

A change in accounting policy shall be made when

a. Required by law.
b. Required by an accounting standard.
c. Required by law and an accounting standard.
d. Neither required by law nor an accounting standard.
ANS: b. Required by an accounting standard.

Question 17

A change in accounting policy requires what kind of adjustment to the financial statements?

a. Current period adjustment.
b. Prospective adjustment.
c. Retrospective adjustment.
d. Current and prospective adjustment.
ANS: c. Retrospective adjustment.

Question 18

A change in accounting policy requires that the cumulative effect of the change for prior periods should be reported as an adjustment to

a. Beginning retained earnings for the earliest period presented
b. Net income
c. Comprehensive income
d. Shareholders’ equity
ANS: a. Beginning retained earnings for the earliest period presented

Question 19

A change in accounting policy includes all of the following, EXCEPT

a. The initial adoption of an accounting policy to carry an asset at revalued amount.
b. The change from cost model to revaluation model in measuring property, plant, and equipment.
c. A change in the measurement basis.
d. A change in the method of depreciation.
ANS: d. A change in the method of depreciation

Question 20

Which should be treated as a change in accounting policy?

a. A change is made in the method of calculating the provision for doubtful accounts.
b. A change from cost model to fair value model in measuring investment property.
c. An entity engaging in construction contracts for the first time needs an accounting policy to deal with this.
d. All of these qualify as a change in accounting policy.
ANS: b. A change from cost model to fair value model in measuring investment property

Question 21

When it is difficult to distinguish between a change in accounting estimate and a change in accounting policy, the change is treated as

a. Change in accounting estimate with disclosure
b. Change in accounting policy
c. Correction of an error
d. Change in accounting estimate with no disclosure
ANS: a. Change in accounting estimate with disclosure

Question 22

Which is a change in accounting policy?

a. Change in useful life of equipment
b. Change from cash basis to accrual basis
c. Change from expensing immaterial expenditures to deferring and amortizing them when material
d. Change from FIFO to average inventory valuation
ANS: b. Change from cash basis to accrual basis

Question 23

An entity that changed an accounting policy voluntarily should

a. Inform shareholders prior to taking the decision.
b. Account for the change retrospectively.
c. Treat the effect of the change as a component of OCI.
d. Treat the change prospectively.
ANS: b. Account for the change retrospectively

Question 24

Which statement best describes prospective application?

a. Recognizing a change in accounting policy in the current and future periods affected by the change.
b. Correcting the financial statements as if a prior period error had never occurred.
c. Applying a new accounting policy to transactions occurring after the date the policy is changed.
d. Applying a new accounting policy to transactions as if that policy had always been applied.
ANS: c. Applying a new accounting policy to transactions occurring after the date the policy is changed

Question 25

Which describes applying a new accounting policy to transactions as if that policy had always been applied?

a. Retrospective application
b. Retrospective restatement
c. Prospective application
d. Prospective restatement
ANS: a. Retrospective application

Question 26

This means correcting the recognition, measurement, and disclosure of amounts of elements of financial statements as if a prior period error had never occurred.

a. Retrospective application
b. Retrospective restatement
c. Prospective application
d. Prospective restatement
ANS: b. Retrospective restatement

Question 27

If it is impracticable to determine the cumulative effect of an accounting change to any of the prior periods, the accounting change should be accounted for

a. As a prior period error
b. On a prospective basis
c. As a cumulative effect change in the income statement
d. As an adjustment of retained earnings
ANS: b. On a prospective basis