Deck 22: Accounting Changes and Error Analysis

Question 1

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 1

True

Question 2

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 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

Companies report changes in accounting estimates retrospectively.

Question 6

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

Question 7

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

Question 8

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.

Question 9

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

Question 10

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.

Question 11

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.

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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.

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

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.

Question 24

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.

Question 25

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.

Question 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

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.

Question 31

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.

Question 32

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.

Question 33

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

Question 34

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.

Question 35

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

Question 36

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

Question 37

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.

Question 38

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

Question 39

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.

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

Question 41

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.

Question 42

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

Question 43

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.

Question 44

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.

Question 45

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.

Question 46

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

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

Question 48

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.

Question 49

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.

Question 50

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, liabilities, and equity at year end and net income for the year?

Question 51

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.

Question 52

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.

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