Topic 3 (Chapter 22 TB)

Question 1

A change in accounting policy is a change that occurs as the result of new information or additional experience.

Answer 1

FALSE

Question 2

Errors in financial statements result from mathematical mistakes or oversight or misuse of facts that existed when preparing the financial statements.

Answer 2

TRUE

Question 3

Adoption of a new policy in recognition of events that have occurred for the first time or that were previously immaterial is treated as an accounting change.

Answer 3

FALSE

Question 4

Retrospective application refers to the application of a different accounting policy to recast previously issued financial statements—as if the new policy had always been used.

Answer 4

TRUE

Question 5

When a company changes an accounting policy, it should report the change by reporting the cumulative effect of the change in the current year’s income statement.

Answer 5

FALSE

Question 6

One of the disclosure requirements for a change in accounting policy is to show the cumulative effect of the change on retained earnings as of the beginning of the earliest period presented.

Answer 6

TRUE

Question 7

An indirect effect of an accounting change is any change to current or future cash flows of a company that result from making a change in accounting policy that is applied retrospectively.

Answer 7

TRUE

Question 8

The IASB is silent on the application of the direct effects of a change in accounting policy.

Answer 8

FALSE

Question 9

The new IFRS on financial instruments will be subject to the proper accounting for changes in accounting policy

Answer 9

TRUE

Question 10

The requirements for disclosure are the same whether a change is voluntary or is mandated by the issuance of a new IFRS

Answer 10

FALSE

Question 11

Under U.S. GAAP, the impracticality exception applies both to changes in accounting policies and to the correction of errors.

Answer 11

FALSE

Question 12

Retrospective application is considered impracticable if a company cannot determine the prior period effects using every reasonable effort to do so.

Answer 12

TRUE

Question 13

Companies report changes in accounting estimates retrospectively

Answer 13

FALSE

Question 14

When it is impossible to determine whether a change in policy or change in estimate has occurred, the change is considered a change in estimate.

Answer 14

TRUE

Question 15

Companies account for a change in depreciation methods as a change in accounting policy.

Answer 15

FALSE

Question 16

Accounting errors include changes in estimates that occur because a company acquires more experience, or as it obtains additional information.

Answer 16

FALSE

Question 17

Companies record corrections of errors from prior periods as an adjustment to the beginning balance of retained earnings in the current period.

Answer 17

TRUE

Question 18

If an IASB standard creates a new policy, expresses preference for, or rejects a specific accounting policy, the change is considered clearly acceptable.

Answer 18

TRUE

Question 19

Statement of financial position errors affect only the presentation of an asset or liability account.

Answer 19

FALSE

Question 20

Counterbalancing errors are those that will be offset and that take longer than two periods to correct themselves.

Answer 20

FALSE

Question 21

For counterbalancing errors, restatement of comparative financial statements is necessary even if a correcting entry is not required.

Answer 21

TRUE

Question 22

Companies must make correcting entries for non-counterbalancing errors, even if they have closed the prior year’s books.

Answer 22

TRUE

Question 23

An income statement classification error has no effect on the statement of financial position and no effect on net income

Answer 23

TRUE

Question 24

The accounting for change in estimates differs between U.S. GAAP and IFRS.

Answer 24

FALSE

Question 25

Non-counterbalancing errors are those that longer than two periods to correct themselves

Answer 25

TRUE

Question 26

Accounting changes are often made and the monetary impact is reflected in the financial statements of a company even though, in theory, this may be a violation of the accounting concept of

a. materiality.
b. consistency.
c. prudence.
d. objectivity.

Answer 26

consistency.

Question 27

Which of the following is not classified as an accounting change by IASB?

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

Answer 27

Errors in the financial statements

Question 28

Which of the following is the best explanation for why IASB has classified accounting changes into different categories?

a. IASB established categories based on the materiality of the changes involved.
b. IASB classifies changes in the categories because each category involves different method of recognizing changes in the financial statements.
c. IASB established categories based on the fact that some treatment are consider GAAP and some are not.
d. IASB established the categories based on a survey of managers and their need to provide a favorable profit picture.

Answer 28

IASB classifies changes in the categories because each category involves different method of recognizing changes in the financial statements.

Question 29

IASB requires companies to use which method for reporting changes in accounting policies?

a. cumulative effect approach
b. retrospective approach
c. prospective approach
d. averaging approach

Answer 29

retrospective approach

Question 30

Which of the following is not treated as a change in accounting policy?

a. A change from average cost to FIFO for inventory valuation
b. A change to a different method of depreciation for plant assets
c. A change from full-cost to successful efforts in the extractive industry
d. A change from cost-recovery to percentage-of-completion

Answer 30

A change to a different method of depreciation for plant assets

Question 31

Which of the following is not a retrospective-type accounting change?

a. Cost-recovery method to the percentage-of-completion method for long-term contracts
b. Cost-recovery method to the FIFO method for inventory valuation
c. Sum-of-the-years’-digits method to the straight-line method
d. “Full cost” method to another method in the extractive industry

Answer 31

Sum-of-the-years’-digits method to the straight-line method

Question 32

Which of the following is accounted for as a change in accounting policy?

a. A change in the estimated useful life of plant assets.
b. A change from the cash basis of accounting to the accrual basis of accounting.
c. A change from expensing immaterial expenditures to deferring and amortizing them as they become material.
d. A change in inventory valuation from average cost to FIFO.

Answer 32

A change in inventory valuation from average cost to FIFO.

Question 33

A company changes from straight-line to an accelerated method of calculating depreciation, which will be similar to the method used for tax purposes. The entry to record this change should include a
a. credit to Accumulated Depreciation.
b. debit to Retained Earnings in the amount of the difference on prior years.
c. debit to Deferred Tax Asset.
d. credit to Deferred Tax Liability.

Answer 33

credit to Accumulated Depreciation.

Question 34

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

a. The cumulative effect on prior years, net of tax, in the current retained earnings statement
b. Restatement of prior years’ income statements
c. Recalculation of current and future years’ depreciation
d. All of these answer choices are required

Answer 34

Recalculation of current and future years’ depreciation

Question 35

Which of the following would be a reason where IASB would permit companies to change accounting policy?

a. The change would allow the company to present a more favorable profit picture.
b. The change would result in the financial statements providing more reliable and relevant information about a company`s financial position, financial performance, and cash flows.
c. The change is made by the internal auditor.
d. The change will be long-term.

Answer 35

The change would result in the financial statements providing more reliable and relevant information about a company`s financial position, financial performance, and cash flows.

Question 36

If a particular transaction is not specifically addressed by IFRS, where should an accountant turn to find a hierarchy of guidance to be considered in the selection of an accounting policy?

a. accounting standards from other countries
b. IAS 8
c. the company’s board of directors
d. the company’s external auditors

Answer 36

IAS 8

Question 37

A company changes from percentage-of-completion to cost-recovery, which is the method used for tax purposes. The entry to record this change should include a

a. debit to Construction in Process.
b. debit to Loss on Long-term Contracts in the amount of the difference on prior years, net of tax.
c. debit to Retained Earnings in the amount of the difference on prior years, net of tax.
d. credit to Deferred Tax Liability.

Answer 37

debit to Retained Earnings in the amount of the difference on prior years, net of tax.

Question 38

Which of the following disclosures is not required for a change from average cost to FIFO?

a. Basic and diluted earnings per share for the current period and each prior period presented
b. The nature of the change in accounting policy
c. The amount of the adjustment relating to periods before those presented
d. All of these answer choices are required

Answer 38

All of these answer choices are required:

a. Basic and diluted earnings per share for the current period and each prior period presented
b. The nature of the change in accounting policy
c. The amount of the adjustment relating to periods before those presented

Question 39

Stone Company changed its method of pricing inventories from average cost to FIFO. What type of accounting change does this represent?

a. A change in accounting estimate for which the financial statements for prior periods included for comparative purposes should be presented as previously reported.
b. A change in accounting policy for which the financial statements for prior periods included for comparative purposes should be presented as previously reported.
c. A change in accounting estimate for which the financial statements for prior periods included for comparative purposes should be restated.
d. A change in accounting policy for which the financial statements for prior periods included for comparative purposes should be restated.

Answer 39

A change in accounting policy for which the financial statements for prior periods included for comparative purposes should be restated.

Question 40

Which type of accounting change should always be accounted for in current and future periods?

a. Change in accounting policy
b. Change in reporting entity
c. Change in accounting estimate
d. Correction of an error

Answer 40

Change in accounting estimate

Question 41

Which of the following is (are) the proper time period(s) to record the effects of a change in accounting estimate?

a. Current period and prospectively
b. Current period and retrospectively
c. Retrospectively only
d. Current period only

Answer 41

Current period and prospectively

Question 42

When a company decides to switch from the double-declining balance method to the straight-line method, this change should be handled as a

a. change in accounting policy.
b. change in accounting estimate.
c. prior period adjustment.
d. correction of an error.

Answer 42

change in accounting estimate.

Question 43

The estimated life of a building that has been depreciated 30 years of an originally estimated life of 50 years has been revised to a remaining life of 10 years. Based on this information, the accountant should

a. continue to depreciate the building over the original 50-year life.
b. depreciate the remaining book value over the remaining life of the asset.
c. adjust accumulated depreciation to its appropriate balance, through net income, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years.
d. adjust accumulated depreciation to its appropriate balance through retained earnings, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years.

Answer 43

depreciate the remaining book value over the remaining life of the asset.

Question 44

Which of the following statements is correct?

a. Changes in accounting policy are always handled in the current or prospective period.
b. Prior statements should be restated for changes in accounting estimates.
c. A change from expensing certain costs to capitalizing these costs due to a change in the period benefited, should be handled as a change in accounting estimate.
d. Correction of an error related to a prior period should be considered as an adjustment to current year net income.

Answer 44

A change from expensing certain costs to capitalizing these costs due to a change in the period benefited, should be handled as a change in accounting estimate.

Question 45

Why does IASB prohibit retrospective treatment of changes in accounting estimates?

a. The IASB view changes in estimates as normal recurring corrections and adjustments, which are the natural result of the accounting process.
b. The IASB does not allow the retrospective treatment for any type of presentation.
c. The IASB prohibits retrospective treatment of changes in accounting estimates because IFRS requires it.
d. IASB does not prohibit retrospective treatment of changes in accounting estimates, but is silent on this issue

Answer 45

The IASB view changes in estimates as normal recurring corrections and adjustments, which are the natural result of the accounting process.

Question 46

All of the following statements are true regarding IASB’s guideline that companies must demonstrate change in accounting policy as preferable or as an improvement, except

a. Diversity in situations and characteristics of the items encountered in practice require the use of professional judgment.
b. Changes in accounting policy are appropriate only when a company demonstrates that the newly adopted generally accepted accounting policy is more relevant and reliable than the existing one.
c. Changes in accounting policy are appropriate only when a company demonstrates an improved income tax effect alone.
d. All of these statements are true.

Answer 46

Changes in accounting policy are appropriate only when a company demonstrates an improved income tax effect alone.

Question 47

Each of the following errors will overstate 2016 net income except

a. Equipment purchased in 2015 was expensed.
b. Wages payable were not recorded at 12/31/16.
c. Equipment purchased in 2016 was expensed.
d. 2016 ending inventory was overstated

Answer 47

Equipment purchased in 2016 was expensed.

Question 48

Yee Construction Co. had followed the practice of expensing all materials assigned to a construction job without recognizing any residual inventory. On December 31, 2016, it was determined that residual inventory should be valued at ¥56,000. Of this amount, ¥23,000 arose during the current year. Based on this information, all of the following statements are true regarding the effect on the financial statements to be prepared at the end of 2016 except

a. ¥23,000 should be reported in the 2016 statements as a reduction of materials cost.
b. ¥33,000 should be reported as an adjustment to the beginning balance of retained earnings in the 2016 financial statements.
c. This change should be handled as a correction of an error.
d. This change should be handled as a change in accounting estimate.

Answer 48

This change should be handled as a change in accounting estimate.

Question 49

An example of a correction of an error in previously issued financial statements is a change

a. from the FIFO method of inventory valuation to the average cost method.
b. in the service life of plant assets, based on changes in the economic environment.
c. from the cash basis of accounting to the accrual basis of accounting.
d. in the tax assessment related to a prior period.

Answer 49

from the cash basis of accounting to the accrual basis of accounting.

Question 50

The IASB has declared, as part of its conceptual framework, that it will assess the merits of proposed standards

a. from a position of neutrality.
b. from a position of materiality.
c. based on the possible impact on behavior.
d. based on lobbyist arguments.

Answer 50

from a position of neutrality.

Question 51

Which of the following is true regarding whether IFRS specifically addresses the accounting and reporting for effects of changes in accounting policies?

Does the IFRS address the direct effects of changes in accounting policies?

Answer 51

YES

Question 52

Which of the following is true regarding whether IFRS specifically addresses the accounting and reporting for effects of changes in accounting policies?

Does the IFRS address the indirect effects of changes in accounting policies?

Answer 52

NO

Question 53

Under IFRS, when a company prepares financial statements on a new basis, how many years of comparative data are reported?

a. One
b. Two
c. Three
d. Five

Answer 53

Two

Question 54

Counterbalancing errors do not include

a. errors that correct themselves in two years.
b. errors that correct themselves in three years.
c. an understatement of purchases.
d. an overstatement of unearned revenue.

Answer 54

errors that correct themselves in three years.

Question 55

A company using a perpetual inventory system neglected to record a purchase of merchandise on account at year end. This merchandise was omitted from the year-end physical count.

How will these errors affect assets?

Answer 55

Understate

Question 56

A company using a perpetual inventory system neglected to record a purchase of merchandise on account at year end. This merchandise was omitted from the year-end physical count.

How will these errors affect liabilities?

Answer 56

Understate

Question 57

A company using a perpetual inventory system neglected to record a purchase of merchandise on account at year end. This merchandise was omitted from the year-end physical count.

How will these errors affect equity?

Answer 57

No effect

Question 58

A company using a perpetual inventory system neglected to record a purchase of merchandise on account at year end. This merchandise was omitted from the year-end physical count.

How will these errors affect net income?

Answer 58

No effect.

Perpetual inventory system was used.

Question 59

If, at the end of a period, a company erroneously excluded some goods from its ending inventory and also erroneously did not record the purchase of these goods in its accounting records, these errors would cause

a. the ending inventory and retained earnings to be understated.
b. the ending inventory, cost of goods sold, and retained earnings to be understated.
c. no effect on net income, working capital, and retained earnings.
d. cost of goods sold and net income to be understated

Answer 59

no effect on net income, working capital, and retained earnings.

Question 60

[What type of change is this?]

Change due to understatement of inventory

Answer 60

Error Correction

Question 61

[What type of change is this?]

Change due to charging a new asset directly to an expense account

Answer 61

Error correction

Question 62

[What type of change is this?]

Change from expensing to capitalizing certain costs, due to a change in periods benefited

Answer 62

Change in accounting estimate

Question 63

[What type of change is this?]

Change from FIFO to average-cost inventory procedures

Answer 63

Change in accounting policy

Question 64

[What type of change is this?]

Change due to failure to recognize an accrued (uncollected) revenue

Answer 64

Error correction

Question 65

[What type of change is this?]

Change in amortization period for an intangible asset

Answer 65

Change in accounting estimate

Question 66

[What type of change is this?]

Change in expected recovery of account receivable

Answer 66

Change in accounting estimate

Question 67

[What type of change is this?]

Change in the loss rate on warranty costs

Answer 67

Change in accounting estimate

Question 68

[What type of change is this?]

Change due to failure to recognize and accrue income

Answer 68

Error correction

Question 69

[What type of change is this?]

Change in residual value of a depreciable plant asset

Answer 69

Change in accounting estimate

Question 70

[What type of change is this?]

Change from an unacceptable to an acceptable accounting policy

Answer 70

Error correction

Question 71

[What type of change is this?]

Change in both estimate and acceptable accounting policies

Answer 71

Change in accounting estimate

Question 72

[What type of change is this?]

Change due to failure to recognize a prepaid asset

Answer 72

Error correction

Question 73

[What type of change is this?]

Change from straight-line to sum-of-the-years ‘-digits method of depreciation

Answer 73

Change in accounting estimate

Question 74

[What type of change is this?]

Change in the life of a depreciable plant asset

Answer 74

Change in accounting estimate

Question 75

[What type of change is this?]

Change from one acceptable policy to another acceptable policy

Answer 75

Change in accounting policy

Question 76

[How is this accounting change recognized in the accounting records in the current year?]

Change from straight-line method of depreciation to sum-of-the-years’-digits

Answer 76

Change in accounting estimate.

Currently and prospectively

Question 77

[How is this accounting change recognized in the accounting records in the current year?]

Change from cash basis to accrual basis of accounting

Answer 77

Correction of an error.

Restatement of financial statements of all prior periods presented; adjustment of beginning retained earnings of current period

Question 78

[How is this accounting change recognized in the accounting records in the current year?]

Change from cost-recovery to percentage-of-completion method on construction contracts.

Answer 78

Change in accounting policy.

Retrospective restatement of all affected prior financial statements; adjustment of beginning retained earnings of the current period

Question 79

[How is this accounting change recognized in the accounting records in the current year?]

Change due to failure to record depreciation in a previous period

Answer 79

Correction of error

Restatement of financial statements of the period affected; prior period adjustment; adjustment of beginning retained earnings of the first period after the error

Question 80

[How is this accounting change recognized in the accounting records in the current year?]

Change in the realizability of certain receivables

Answer 80

Change in accounting estimate

Currently and prospectively

Question 81

[How is this accounting change recognized in the accounting records in the current year?]

Change from average cost to FIFO method for inventory valuation purposes

Answer 81

Change in accounting policy.

Retrospective restatement of all effected prior financial statements; adjustment of beginning retained earnings of the current period

Question 82

In 2016, the company changed its method of recognizing income from the cost-recovery method to the percentage-of-completion method.

Which of the following best describes the presentation of the item in the financial statements?
a. Change in estimate
b. Prior period adjustment (not due to change in principle)
c. Retrospective type accounting change with note disclosure
d. None of the above

Answer 82

Retrospective type accounting change with note disclosure

Question 83

At the end of 2016, an audit revealed that the corporation’s allowance for doubtful accounts was too large and should be reduced to 2%. When the audit was made in 2015, the allowance seemed appropriate.

Which of the following best describes the presentation of the item in the financial statements?
a. Change in estimate
b. Prior period adjustment (not due to change in principle)
c. Retrospective type accounting change with note disclosure
d. None of the above

Answer 83

Change in estimate

Question 84

Depreciation on a truck, acquired in 2013, was understated because the useful life had been overestimated. The understatement had been made in order to show higher net income in 2014 and 2015.

Which of the following best describes the presentation of the item in the financial statements?
a. Change in estimate
b. Prior period adjustment (not due to change in principle)
c. Retrospective type accounting change with note disclosure
d. None of the above

Answer 84

Prior period adjustment (not due to change in principle)

Question 85

The company switched from an average-cost to a FIFO inventory valuation method during the current year.

Which of the following best describes the presentation of the item in the financial statements?
a. Change in estimate
b. Prior period adjustment (not due to change in principle)
c. Retrospective type accounting change with note disclosure
d. None of the above

Answer 85

Retrospective type accounting change with note disclosure

Question 86

In the current year, the company decides to change from expensing certain costs to capitalizing these costs, due to a change in the period benefited.

Which of the following best describes the presentation of the item in the financial statements?
a. Change in estimate
b. Prior period adjustment (not due to change in principle)
c. Retrospective type accounting change with note disclosure
d. None of the above

Answer 86

Change in estimate

Question 87

During 2016, a long-term bond with a carrying value of $3,600,000 was retired at a cost of $4,100,000.

Which of the following best describes the presentation of the item in the financial statements?
a. Change in estimate
b. Prior period adjustment (not due to change in principle)
c. Retrospective type accounting change with note disclosure
d. None of the above

Answer 87

This is just a normal transaction.

Question 88

After negotiations with the taxing authority, income taxes for 2014 were established at $42,900. They were originally estimated to be $28,600.

Which of the following best describes the presentation of the item in the financial statements?
a. Change in estimate
b. Prior period adjustment (not due to change in principle)
c. Retrospective type accounting change with note disclosure
d. None of the above

Answer 88

Change in estimate

Question 89

In 2016, the company incurred interest expense of $29,000 on a 20-year bond issue.

Which of the following best describes the presentation of the item in the financial statements?
a. Change in estimate
b. Prior period adjustment (not due to change in principle)
c. Retrospective type accounting change with note disclosure
d. None of the above

Answer 89

This is just a normal transaction.

Question 90

In computing the depreciation in 2014 for equipment, an error was made which overstated income in that year $75,000. The error was discovered in 2016.

Which of the following best describes the presentation of the item in the financial statements?
a. Change in estimate
b. Prior period adjustment (not due to change in principle)
c. Retrospective type accounting change with note disclosure
d. None of the above

Answer 90

Prior period adjustment (not due to change in principle)

Question 91

In 2016, the company changed its method of depreciating plant assets from the double-declining balance method to the straight-line method.

Which of the following best describes the presentation of the item in the financial statements?
a. Change in estimate
b. Prior period adjustment (not due to change in principle)
c. Retrospective type accounting change with note disclosure
d. None of the above

Answer 91

Change in estimate