Changes In Accounting Principle Quiz Questions

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 consistency. Consistency is an important accounting principle that states that once an accounting method or principle is chosen, it should be consistently applied over time. However, accounting changes may occur due to various reasons such as changes in accounting standards, business transactions, or new information. While these changes may impact the financial statements, they are made to improve the accuracy and relevance of the financial information provided to users.

The proper time period(s) to record the effects of a change in accounting estimate are the current period and prospectively. This means that the change in estimate should be applied to the current period's financial statements and any future periods going forward. This ensures that the effects of the change are accurately reflected in the financial statements and allows for consistency in reporting.

All of these disclosures are required when a company changes from LIFO to FIFO. The cumulative effect on prior years, net of tax, needs to be disclosed in the current retained earnings statement to show the impact of the change. The justification for the change is necessary to explain the reasons behind the switch. Restated prior year income statements are required to reflect the change in accounting method and provide accurate historical financial information. Therefore, all of these disclosures are necessary when transitioning from LIFO to FIFO.

When a company decides to switch from the double-declining balance method to the straight-line method, it is considered a change in accounting estimate. This is because the company is changing the way it estimates the depreciation expense for its assets. It is not a change in accounting principle, as both methods are acceptable under generally accepted accounting principles (GAAP). It is also not a prior period adjustment or a correction of an error, as these terms refer to adjustments made to correct mistakes in previous financial statements.

A change in accounting estimate should always be accounted for in current and future periods because it reflects a revision to the estimation of an amount in the financial statements. This type of change is necessary when new information becomes available or when circumstances change, and it is important to adjust the financial statements accordingly to provide accurate and reliable information to users. Unlike a change in accounting principle or a change in reporting entity, which may only impact the current period, a change in accounting estimate has an ongoing effect on future periods as well. A correction of an error refers to fixing a mistake made in previous financial statements and does not necessarily have an impact on current and future periods.

A change to a different method of depreciation for plant assets is not treated as a change in accounting principle because it is considered a change in accounting estimate, not a change in accounting principle. Changes in accounting principle involve the adoption of a new accounting framework or the application of different accounting methods, whereas changes in accounting estimate involve revising estimates based on new information or experience.

The correct answer is c. When presenting consolidated financial statements this year after presenting statements of individual companies last year, it indicates an accounting change. This change should be reported by restating the financial statements of all prior periods presented. This means that the financial statements from previous years need to be adjusted to reflect the change in presentation. It is not a correction of an error or a prospective accounting change.

A change in inventory valuation from average cost to FIFO is accounted for as a change in accounting principle because it involves a change in the method used to value inventory. The average cost method calculates the cost of inventory by taking the average of all units purchased, while the FIFO (first-in, first-out) method values inventory based on the assumption that the first units purchased are the first ones sold. This change in valuation method affects the way inventory is reported on the financial statements and requires a retrospective adjustment to restate prior periods' financial statements to reflect the new method.

The Sum-of-the-years'-digits method and the straight-line method are both depreciation methods used in accounting. Therefore, changing from one to the other would not be considered a retrospective-type accounting change. Retrospective-type accounting changes involve changing accounting principles or methods that affect the financial statements of prior periods. Changing from completed-contract method to percentage-of-completion method, LIFO method to FIFO method, or "full cost" method to another method in the extractive industry would all be examples of retrospective-type accounting changes.

When a company changes from the percentage-of-completion method to the completed-contract method for tax purposes, the entry to record this change should include a debit to Retained Earnings in the amount of the difference on prior years, net of tax. This is because the change in accounting method will affect the recognition of revenue and expenses, resulting in a difference in the financial statements. Retained Earnings is used to capture this difference and adjust the company's overall financial position.

Counterbalancing errors are errors that are made in one period but are corrected in a subsequent period. These errors may include an understatement of purchases or an overstatement of unearned revenue. However, errors that correct themselves in three years are not considered counterbalancing errors. This suggests that these errors are not typically corrected in the following period and may require longer periods of time to be rectified.

A change in reporting entity refers to a change in the companies included in combined financial statements. This means that there has been a change in the composition of the entities whose financial information is being presented together. This could be due to mergers, acquisitions, divestitures, or any other change in the companies included in the financial statements.

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This represents a change in accounting principle because the company has changed its method of pricing inventories from FIFO to LIFO. This change in accounting principle requires the financial statements for prior periods included for comparative purposes to be presented as previously reported.

An example of a correction of an error in previously issued financial statements is when a company changes from the cash basis of accounting to the accrual basis of accounting. The cash basis of accounting records transactions when cash is received or paid, while the accrual basis records transactions when they occur, regardless of when cash is exchanged. This change in accounting method can result in a more accurate representation of the company's financial position and performance.

When a company changes its method of calculating depreciation, it needs to adjust its Accumulated Depreciation account to reflect the new method. Since the company is switching to an accelerated method, it means that the depreciation expense will be higher in the early years and lower in the later years compared to the straight-line method. To account for this change, a credit entry is made to the Accumulated Depreciation account to reduce its balance and reflect the higher depreciation expense under the new method. Therefore, the correct answer is a. credit to Accumulated Depreciation.

If a company erroneously excludes some goods from its ending inventory and also fails to record the purchase of these goods in its accounting records, it would not have any effect on net income, working capital, and retained earnings. This is because the exclusion of goods from the ending inventory would not impact the calculation of net income, as it only affects the balance sheet. Similarly, working capital and retained earnings are not affected by this error as they are calculated based on different financial metrics.

When changing from sum-of-the-years-digits to straight-line depreciation, it is necessary to recompute the current and future years' depreciation. This is because the change in depreciation method will affect the amount of depreciation expense recorded in each period going forward. The cumulative effect on prior years, net of tax, in the current retained earnings statement and restatement of prior years' income statements are not required for this change.