Changes In Accounting Principle Quiz Questions

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  • 1/18 Questions

      21.     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. conservatism.
    • D. objectivity.
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About This Quiz

This quiz focuses on changes in accounting principles, assessing understanding of consistency, depreciation methods, inventory valuation, and required disclosures. It is designed for learners to grasp complex financial reporting standards and their application in real-world scenarios.

Changes In Accounting Principle Quiz Questions - Quiz

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  • 2. 

      31.     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

    Correct Answer
    A. A. Current period and prospectively
    Explanation
    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.

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  • 3. 

      28.     Which of the following disclosures is required for a change from LIFO to FIFO?

    • A. The cumulative effect on prior years, net of tax, in the current retained earnings statement

    • B. The justification for the change

    • C. Restated prior year income statements

    • D. All of these are required.

    Correct Answer
    A. D. All of these are required.
    Explanation
    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.

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  • 4. 

      32.     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 principle.

    • B. change in accounting estimate.

    • C. prior period adjustment.

    • D. correction of an error.

    Correct Answer
    A. B. change in accounting estimate.
    Explanation
    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.

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  • 5. 

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

    • A. Change in accounting principle

    • B. Change in reporting entity

    • C. Change in accounting estimate

    • D. Correction of an error

    Correct Answer
    A. C. Change in accounting estimate
    Explanation
    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.

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  • 6. 

      22.     Which of the following is not treated as a change in accounting principle?

    • A. A change from LIFO 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 completed-contract to percentage-of-completion

    Correct Answer
    A. B. A change to a different method of depreciation for plant assets
    Explanation
    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.

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  • 7. 

      36.     Presenting consolidated financial statements this year when statements of individual companies were presented last year isa. 

    • A. a correction of an error.

    • B. an accounting change that should be reported prospectively.

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

    • D. not an accounting change.

    Correct Answer
    A. C. an accounting change that should be reported by restating the financial statements of all prior periods presented.
    Explanation
    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.

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  • 8. 

      24.     Which of the following is accounted for as a change in accounting principle?

    • 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.

    Correct Answer
    A. D. A change in inventory valuation from average cost to FIFO.
    Explanation
    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.

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  • 9. 

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

    • A. Completed-contract method to the percentage-of-completion method for long-term contracts

    • B. LIFO 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

    Correct Answer
    A. C. Sum-of-the-years'-digits method to the straight-line method
    Explanation
    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.

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  • 10. 

      27.     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 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.

    Correct Answer
    A. C. debit to Retained Earnings in the amount of the difference on prior years, net of tax.
    Explanation
    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.

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  • 11. 

      38.     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.

    Correct Answer
    A. B. errors that correct themselves in three years.
    Explanation
    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.

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  • 12. 

      35.     Which of the following describes a change in reporting entity?

    • A. A company acquires a subsidiary that is to be accounted for as a purchase.

    • B. A manufacturing company expands its market from regional to nationwide.

    • C. A company divests itself of a European branch sales office.

    • D. Changing the companies included in combined financial statements.

    Correct Answer
    A. D. Changing the companies included in combined financial statements.
    Explanation
    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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  • 13. 

      34.     Which of the following statements is correct?

    • A. Changes in accounting principle 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.

    Correct Answer
    A. 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.
  • 14. 

      29.     Stone Company changed its method of pricing inventories from FIFO to LIFO. 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 principle 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 principle for which the financial statements for prior periods included for comparative purposes should be restated.

    Correct Answer
    A. B. A change in accounting principle for which the financial statements for prior periods included for comparative purposes should be presented as previously reported.
    Explanation
    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.

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  • 15. 

      37.     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 LIFO 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.

    Correct Answer
    A. C. from the cash basis of accounting to the accrual basis of accounting.
    Explanation
    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.

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  • 16. 

      25.     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.

    Correct Answer
    A. A. credit to Accumulated Depreciation.
    Explanation
    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.

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  • 17. 

      40.     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.

    Correct Answer
    A. C. no effect on net income, working capital, and retained earnings.
    Explanation
    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.

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  • 18. 

      26.     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. Recomputation of current and future years’ depreciation

    • D. All of these are required.

    Correct Answer
    A. C. Recomputation of current and future years’ depreciation
    Explanation
    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.

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  • Current Version
  • Mar 21, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • May 11, 2011
    Quiz Created by
    Deltzx301
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