Chapter 22

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Section 1

Question Answer
A change in accounting principle is a change that occurs as the result of new information or additional experience. False
Errors in financial statements result from mathematical mistakes or oversight or misuse of facts that existed when preparing the financial statements. True
Adoption of a new principle in recognition of events that have occurred for the first time or that were previously immaterial is treated as an accounting change.False
Retrospective application refers to the application of a different accounting principle to recast previously issued financial statements—as if the new principle had always been used.True
When a company changes an accounting principle, it should report the change by reporting the cumulative effect of the change in the current year’s income statement.False
One of the disclosure requirements for a change in accounting principle is to show the cumulative effect of the change on retained earnings as of the beginning of the earliest period presented.True
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 principle that is applied retrospectively. True
Retrospective application is considered impracticable if a company cannot determine the prior period effects using every reasonable effort to do so.True
Companies report changes in accounting estimates retrospectively.False
When it is impossible to determine whether a change in principle or change in estimate has occurred, the change is considered a change in estimate.True

Section 2

Question Answer
Companies account for a change in depreciation methods as a change in accounting principle.False
When companies make changes that result in different reporting entities, the change is reported prospectively.False
Changing the cost or equity method of accounting for investments is an example of a change in reporting entity.True
Accounting errors include changes in estimates that occur because a company acquires more experience, or as it obtains additional information.False
Companies record corrections of errors from prior periods as an adjustment to the beginning balance of retained earnings in the current period.True
If an FASB standard creates a new principle, expresses preference for, or rejects a specific accounting principle, the change is considered clearly acceptable.True
Balance sheet errors affect only the presentation of an asset or liability account.False
Counterbalancing errors are those that will be offset and that take longer than two periods to correct themselves.False
For counterbalancing errors, restatement of comparative financial statements is necessary even if a correcting entry is not required.True
Companies must make correcting entries for noncounterbalancing errors, even if they have closed the prior year’s books.True

Section 3

Question Answer
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 ofconsistency
Which of the following is not treated as a change in accounting principle?A change to a different method of depreciation for plant assets
Which of the following is not a retrospective-type accounting change?Sum-of-the-years'-digits method to the straight-line method
Which of the following is accounted for as a change in accounting principle?A change in inventory valuation from average cost to FIFO.
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 acredit to Accumulated Depreciation.
Which of the following disclosures is required for a change from sum-of-the-years-digits to straight-line?Recomputation of current and future years’ depreciation
A company changes from percentage-of-completion to completed-contract, which is the method used for tax purposes. The entry to record this change should include adebit to Retained Earnings in the amount of the difference on prior years, net of tax.
Which of the following disclosures is required for a change from LIFO to FIFO?The cumulative effect on prior years, net of tax, in the current retained earnings statement, the justification for the change, and restated prior year income statements
Stone Company changed its method of pricing inventories from FIFO to LIFO. What type of accounting change does this represent?A change in accounting principle for which the financial statements for prior periods included for comparative purposes should be restated.
Which type of accounting change should always be accounted for in current and future periods?Change in accounting estimate

Section 4

Question Answer
Which of the following is (are) the proper time period(s) to record the effects of a change in accounting estimate?Current period and prospectively
When a company decides to switch from the double-declining balance method to the straight-line method, this change should be handled as achange in accounting estimate
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 shoulddepreciate the remaining book value over the remaining life of the asset.
Which of the following statements is correct?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.
Which of the following describes a change in reporting entity?Changing the companies included in combined financial statements.
Presenting consolidated financial statements this year when statements of individual companies were presented last year isan accounting change that should be reported by restating the financial statements of all prior periods presented.
An example of a correction of an error in previously issued financial statements is a changefrom the cash basis of accounting to the accrual basis of accounting.
Counterbalancing errors do not includeerrors that correct themselves in three years.
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 stockholders' equity at year end and net income for the year?Assets: Understate. Liabilities: Understate. Stockholder's Equity: No effect. Net income: No effect.
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 causeno effect on net income, working capital, and retained earnings.