Chapter 20

How many acceptable approaches are there for changes in accounting principles?

A. One.

B. Two.

C. Three.

D. Four.

B. Two.

Which of the following is not one of the approaches for reporting accounting changes?

A. The change approach.

B. The retrospective approach.

C. The prospective approach.

D. All three of the above are approaches for reporting accounting changes.

A. The change approach.

An accounting change that is reported by the prospective approach is reflected in the financial statements of:

A. Prior years only.

B. Prior years plus the current year.

C. The current year only.

D. Current and future years.

D. Current and future years.

When a change in accounting principle is reported, what is sometimes sacrificed?

A. Relevance.

B. Consistency.

C. Conservatism.

D. Representational faithfulness.

B. Consistency.

When an accounting change is reported under the retrospective approach, prior years’ financial statements are:

A. Revised to reflect the use of the new principle.

B. Reported as previously prepared.

C. Left unchanged.

D. Adjusted using prior period adjustment procedures.

A. Revised to reflect the use of the new principle.

Regardless of the type of accounting change that occurs, the most important responsibility is:

A. To properly determine the tax effect.

B. To communicate that a change has occurred.

C. To compute the correct amount of the change.

D. None of the above is correct.

B. To communicate that a change has occurred.

Which of the following changes would not be accounted for using the prospective approach?

A. A change to LIFO from average costing for inventories.

B. A change from the individual application of the LCM rule to aggregate approach.

C. A change from straight-line to double-declining balance depreciation.

D. A change from double-declining balance to straight-line depreciation.

B. A change from the individual application of the LCM rule to aggregate approach.

Accounting changes occur for which of the following reasons?

A. Management is being fair and consistent in financial reporting.

B. Management compensation is affected.

C. Debt agreements are impacted.

D. All of the above.

D. All of the above.

Which of the accounting changes listed below is more associated with financial statements prepared in accordance with U.S. GAAP than with International Financial Reporting Standards?

A. Change in reporting entity.

B. Change to the LIFO method from the FIFO method.

C. Change in accounting estimate.

D. Change in depreciation methods.

B. Change to the LIFO method from the FIFO method.

Which of the following changes should be accounted for using the retrospective approach?

A. A change in the estimated life of a depreciable asset.

B. A change from straight-line to declining balance depreciation.

C. A change to the LIFO method of costing inventories.

D. A change from the completed-contract method of accounting for long-term construction contracts.

D. A change from the completed-contract method of accounting for long-term construction contracts.

Companies should report the cumulative effect of an accounting change in the income statement:

A. In the quarter in which the change is made.

B. In the annual financial statements only.

C. In the first quarter of the fiscal year in which the change is made.

D. Never.

D. Never.

Disclosure notes related to a change in accounting principle under the retrospective approach should include:

A. The effect of the change on executive compensation.

B. The auditor’s approval of the change.

C. The SEC’s permission to change.

D. Justification for the change.

D. Justification for the change.

Which of the following is an example of a change in accounting principle?

A. A change in inventory costing methods.

B. A change in the estimated useful life of a depreciable asset.

C. A change in the actuarial life expectancies of employees under a pension plan.

D. Consolidating a new subsidiary.

A. A change in inventory costing methods.

Which of the following is not an example of a change in accounting principle?

A. A change in the useful life of a depreciable asset.

B. A change from LIFO to FIFO for inventory costing.

C. A change to the full costing method in the extractive industries.

D. A change from the cost method to the equity method of accounting for investments.

A. A change in the useful life of a depreciable asset.

When the retrospective approach is used for a change to the FIFO method, which of the following accounts is usually not adjusted?

A. Deferred Income Taxes.

B. Inventory.

C. Retained Earnings.

D. All of the above usually are adjusted.

D. All of the above usually are adjusted.

JFS Co. changed from straight-line to DDB depreciation. The journal entry to record the change includes:

A. A credit to accumulated depreciation.

B. A debit to accumulated depreciation.

C. A debit to a depreciable asset.

D. The change does not require a journal entry.

D. The change does not require a journal entry.

National Hoopla Company switches from sum-of-the-years’ digits depreciation to straight-line depreciation. As a result:

A. Current income tax payable increases.

B. The cumulative effect decreases current period earnings.

C. Prior periods’ financial statements are restated.

D. None of the above is correct.

D. None of the above is correct.

If a change is made from straight-line to SYD depreciation, one should record the effects by a journal entry including:

A. A credit to deferred tax liability.

B. A credit to accumulated depreciation.

C. A debit to depreciation expense.

D. No journal entry is required.

D. No journal entry is required.

Which of the following accounting changes should not be accounted for prospectively?

A. The correction of an error.

B. A change from declining balance to straight-line depreciation.

C. A change from straight-line to declining balance depreciation.

D. A change in the expected salvage value of a depreciable asset.

A. The correction of an error.

Prior years’ financial statements are restated under the:

A. Current approach.

B. Prospective approach.

C. Retrospective approach.

D. None of the above is correct.

C. Retrospective approach.

A change that uses the prospective approach is accounted for by:

A. Implementing it in the current year.

B. Reporting pro forma data.

C. Retrospective restatement of all prior financial statements in a comparative annual report.

D. Giving current recognition of the past effect of the change.

A. Implementing it in the current year.

The cumulative effect of most changes in accounting principle is reported:

A. In the income statement between extraordinary items and net income.

B. In the income statement after income and before income tax.

C. In the income statement between discontinued operations and extraordinary items.

D. In the balance sheet accounts affected.

D. In the balance sheet accounts affected.

When an accounting change is reported under the retrospective approach, account balances in the general ledger:

A. Are not adjusted.

B. Are closed out and then updated.

C. Are adjusted net of the tax effect.

D. Are adjusted to what they would have been had the new method been used in previous years.

D. Are adjusted to what they would have been had the new method been used in previous years.

During 2013, Hoffman Co. decides to use FIFO to account for its inventory transactions. Previously, it had used LIFO.

A. Hoffman is not required to make any accounting adjustments.

B. Hoffman has made a change in accounting principle requiring retrospective adjustment.

C. Hoffman has made a change in accounting principle requiring prospective application.

D. Hoffman needs to correct an accounting error.

B. Hoffman has made a change in accounting principle requiring retrospective adjustment.

Which of the following would not be accounted for using the retrospective approach?

A. A change from LIFO to FIFO inventory costing.

B. A change from the completed contract method to the percent-of-completion method for long-term construction contracts.

C. A change in depreciation methods.

D. A change from the full cost method in the oil industry.

C. A change in depreciation methods.

Which of the following would not be accounted for using the prospective approach?

A. A change to LIFO from FIFO for inventory costing.

B. A change in price indexes used under the LIFO method of inventory costing.

C. A change in estimate.

D. A change from the cash basis to accrual accounting.

D. A change from the cash basis to accrual accounting.

Which of the following changes should be accounted for using the retrospective approach?

A. A change in the estimated useful life of a depreciable asset.

B. A change from straight-line to double-declining-balance depreciation.

C. A change from percentage-of-completion to the completed contract method.

D. A change to LIFO from FIFO inventory costing.

C. A change from percentage-of-completion to the completed contract method.

For 2012, P Co. estimated its two-year equipment warranty costs based on $23 per unit sold in 2012. Experience during 2013 indicated that the estimate should have been based on $25 per unit. The effect of this $2 difference from the estimate is reported:

A. In 2013 income from continuing operations.

B. As an accounting change, net of tax, below 2013 income from continuing operations.

C. As an accounting change requiring 2012 financial statements to be restated.

D. As a correction of an error requiring 2012 financial statements to be restated.

A. In 2013 income from continuing operations

Which of the following is a change in estimate?

A. A change from the full costing method in the extractive industries.

B. A change from percentage-of-completion to the completed contract method.

C. Consolidating a subsidiary for the first time.

D. A change in the termination rate of employees under a pension plan.

D. A change in the termination rate of employees under a pension plan.

Which of the following is not a change in estimate?

A. A change in the useful life of a depreciable asset.

B. A change in the mortality rate used for pension computations.

C. A change from the cost to the equity method in accounting for investments.

D. A change in the warranty expense percentage.

C. A change from the cost to the equity method in accounting for investments.

A change in the residual value of equipment is accounted for:

A. As a prior period adjustment.

B. Prospectively.

C. Retrospectively.

D. None of the above is correct.

B. Prospectively.

Gore Inc. recorded a liability in 2013 for probable litigation losses of $2 million. Ultimately, $5 million in legitimate warranty claims were filed by Gore’s customers.

A. Gore has made a change in accounting principle, requiring retrospective adjustment.

B. Gore needs to correct an accounting error.

C. Gore is required to adjust a change in accounting estimate prospectively.

D. Gore is not required to make any accounting adjustments.

C. Gore is required to adjust a change in accounting estimate prospectively.

Diversified Systems, Inc., reports consolidated financial statements this year in place of statements of individual companies reported in previous years. This results in:

A. An accounting change that should be reported prospectively.

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. Neither an accounting change nor a correction of an error.

B. An accounting change that should be reported by restating the financial statements of all prior periods presented.

Z Company has included in its consolidated financial statements this year a subsidiary acquired several years ago that was appropriately excluded from consolidation last year. This results in:

A. An accounting change that should be reported prospectively.

B. A correction of an error.

C. An accounting change that should be reported by restating the financial statements of all prior periods presented.

D. Neither an accounting change nor a correction of an error.

C. An accounting change that should be reported by restating the financial statements of all prior periods presented.

Which of the following is a change in reporting entity?

A. A change to the full cost method in the extractive industries.

B. Switching to the completed contract method.

C. A change from the cost to the equity method.

D. Consolidating a subsidiary not previously included in consolidated financial statements.

D. Consolidating a subsidiary not previously included in consolidated financial statements.

Which of the following is not a change in reporting entity?

A. Reporting using comparative financial statements for the first time.

B. Changing the companies that comprise a consolidated group.

C. Presenting consolidated financial statements for the first time.

D. All are changes in reporting entity.

A. Reporting using comparative financial statements for the first time.

An item that should be reported as a prior period adjustment is the:

A. Correction of an error in depreciation from last year.

B. Payment of taxes due to a tax audit of last year’s tax return.

C. Payment of a previously recorded warranty expense.

D. Receipt of the proceeds of a note receivable that was due last year.

A. Correction of an error in depreciation from last year.

Cooper Inc. took physical inventory at the end of 2012. Purchases that were acquired FOB destination were in transit, so they were not included in the physical count.

A. Cooper needs to correct an accounting error.

B. Cooper has made a change in accounting principle, requiring retrospective adjustment.

C. Cooper is required to adjust a change in accounting estimate prospectively.

D. Cooper is not required to make any accounting adjustments.

D. Cooper is not required to make any accounting adjustments.

Washburn Co. spent $10 million to purchase a new patented technology, debiting an intangible asset and crediting cash. Washburn uses SYD depreciation on its depreciable assets and plans to amortize the intangible asset on a straight-line basis.

A. Washburn is not required to make any accounting adjustments.

B. Washburn is required to adjust a change in accounting estimate prospectively.

C. Washburn has made a change in accounting principle, requiring retrospective adjustment.

D. Washburn needs to correct an accounting error.

A. Washburn is not required to make any accounting adjustments

In December 2013, Kojak Insurance Co. received $500,000 in premiums for a two-year property insurance policy. The company recorded the transaction by debiting cash and crediting insurance premium revenue for the full amount. An internal audit conducted in early 2014 flagged this transaction.

A. Kojak needs to correct an accounting error.

B. Kojak has made a change in accounting principle, requiring retrospective adjustment.

C. Kojak is required to adjust a change in accounting estimate prospectively.

D. Kojak is not required to make any accounting adjustments.

A. Kojak needs to correct an accounting error.

Which of the following statements is true regarding correcting errors in previously issued financial statements prepared in accordance with International Financial Reporting Standards?

A. The error can be reported in the current period if it’s not considered practicable to report it retrospectively.

B. The error can be reported in the current period if it’s not considered practicable to report it prospectively.

C. The error can be reported prospectively if it’s not considered practicable to report it retrospectively.

D. Retrospective application is required with no exception.

A. The error can be reported in the current period if it’s not considered practicable to report it retrospectively.