CHAPTER 22: ACCOUNTING FOR CHANGES AND ERRORS
1. An advantage of retrospective adjustment method is that it achieves comparability and consistency between accounting
periods.
a.
True
b.
False
True
1
Easy
ACCT.WHAL.16.22.1 – LO: 22.1
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Bloom’s: Remembering
2. A change in a reporting entity is accounted for by a prospective adjustment so that all financial statements are presented
for the same entity.
a.
True
b.
False
False
1
Easy
ACCT.WHAL.16.22.1 – LO: 22.1
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
Bloom’s: Remembering
3. Correction of an error involves corrections to reported financial statements similar to changes in estimates.
a.
True
b.
False
False
1
Easy
ACCT.WHAL.16.22.1 – LO: 22.1
United States – Ohio – Default City – AICPA – FN-Decision Modeling
Bloom’s: Knowledge
Chapter 22: Accounting for Changes and Errors
4. A change in accounting principle because an Accounting Standard Update has been issued and the former principle is
no longer generally accepted is treated under the prospective method.
a.
True
b.
False
False
1
Easy
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5. The FASB requires the use of the retrospective adjustment method because it provides financial statement users with
more useful information when accounting for a change in accounting principles.
a.
True
b.
False
True
1
Easy
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6. An example of a change in accounting principle is the change from the direct method of accounting for uncollectable
accounts to the aging-of-receivables method.
a.
True
b.
False
False
1
Easy
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7. A change in accounting estimate does not result in a retrospective adjustment to previously issued financial statements.
a.
True
b.
False
True
1
Easy
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8. Sometimes a change in estimate and a change in accounting principle are undistinguishable therefore a company should
account for the change as a change in accounting principle.
a.
True
b.
False
False
1
Easy
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9. When a company makes a change in accounting estimate, the company must disclose in the notes the effect of the
change in its income from continuing operations.
a.
True
b.
False
True
1
Easy
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Bloom’s: Knowledge
10. A company accounts for a change in reporting entity as a prospective adjustment so that all the financial statements
are presented for the same entity.
a.
True
b.
False
False
1
Easy
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Bloom’s: Remembering
11. A change in accounting entity is limited to presenting consolidated or combined financial statements in place of
individual statements or a change in the subsidiaries that make up a group of companies in which one would report
either as consolidated financial statements or changing the mix of companies included in the financial statements.
a.
True
b.
False
True
1
Easy
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12. A conglomerate corporation must make retrospective adjustments to account for a material change in reporting entity
every year that it adds a new subsidiary or sells off a formerly owned subsidiary.
a.
True
b.
False
True
1
Easy
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13. Every correction of an error that requires restatement of prior year financial statements requires a journal entry to
increase or decrease the beginning balance of Retained Earnings.
a.
True
b.
False
False
1
Easy
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14. A counterbalancing error will automatically correct itself in the next accounting period even if it is never discovered.
a.
True
b.
False
True
1
Easy
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15. The effect of a prior period adjustment made to correct an error is similar to a retrospective adjustment required for a
change in accounting principle.
a.
True
b.
False
True
1
Easy
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16. The accounting changes identified by current GAAP include all of the following except
a.
change in correction of an error.
b.
change in accounting principle.
c.
change in accounting estimate.
d.
change in reporting entity.
a
1
Easy
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17. Generally accepted methods of accounting for a change in accounting principle include
a.
restating prior years’ financial statements presented for comparative purposes.
b.
including the cumulative effect of the change in current period net income.
c.
prospective changes.
d.
making a prior period adjustment.
a
1
Easy
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18. Which of the following statements does not properly state a basic principle for reporting an accounting change?
a.
b.
c.
d.
d
1
Easy
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19. Which statement concerning accounting for accounting changes and errors is false?
a.
An error is accounted for retrospectively.
b.
A change in accounting principle is accounted for prospectively.
c.
A change in accounting principle may be accounted for retrospectively.
d.
A change in accounting estimate is accounted for prospectively.
b
1
Easy
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20. Which of the following accounting changes is always accounted for prospectively?
a.
change in accounting estimate
b.
change in reporting entity
c.
change in accounting principle
d.
correction of an error
a
1
Easy
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21. Change in an accounting principle is accounted for
a.
prospectively.
b.
by a prior period adjustment.
c.
by a retrospective application of a new accounting principle.
d.
by constructive application of a new accounting principle.
c
1
Easy
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22. A retrospective adjustment requires a change in the
a.
prior period financial statements to look like the current period financial statements.
b.
current period income to reflect the cumulative effect of new method.
c.
prior period financial statements to reflect how they would have been presented had the new method been used
in prior periods.
d.
current period accounts in the financial statements to what they would have been had the previous method
been used in the current period.
c
1
Moderate
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23. Prospective adjustments are expected to
a.
impact financial statements of only previous years.
b.
impact financial statements of previous years and current years as if the accounting principle had always been
used.
c.
produce no impact on the financial statements of previous years.
d.
impact the financial statements of the current year only.
c
1
Easy
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24. Retrospective adjustments are expected to
a.
impact financial statements of only previous years.
b.
impact financial statements of previous years and current years as if the accounting principle had always been
used.
c.
produce no impact on the financial statements of previous years.
d.
produce no impact on the financial statements of the current year.
b
1
Easy
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United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
Bloom’s: Remembering
25. A change in accounting principle from one that is not generally accepted to one that is generally accepted should be
treated as
a.
an error and corrected by prior period adjustment.
b.
a change in accounting principle and the cumulative effect included in net income.
c.
a change in accounting principle and prior period financial statements are restated.
d.
a change in accounting principle and adjustments made prospectively.
a
1
Easy
ACCT.WHAL.16.22.2 – LO: 22.2
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
Bloom’s: Remembering
26. A change from LIFO to FIFO should be accounted for
a.
by footnote disclosure only.
b.
prospectively only.
c.
currently and prospectively.
d.
retrospectively.
d
1
ACCT.WHAL.16.22.2 – LO: 22.2
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27. Disclosure of a retrospective adjustment should include
a.
why the new principle is preferable.
b.
the net impact on assets of the retrospective adjustment.
c.
the retrospective computation of earnings per share only for the current period.
d.
ending balance in Retained Earnings before and after the retrospective adjustment.
a
1
Easy
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28. When making a retrospective adjustment, all of the following steps are included except
a.
computing the cumulative effect of the new accounting principle as of the beginning of the first period
presented.
b.
adjusting the current period net income for the cumulative effect of the change.
c.
adjusting the carrying value of impacted assets and liabilities.
d.
disclose the nature and reason for the change in accounting principle, including the new principle is preferable.
b
1
Moderate
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29. The mandatory adoption of a new accounting principle as a result of a new FASB statement requires
a.
footnote disclosure only.
b.
a cumulative effect adjustment.
c.
retrospective adjustment.
d.
prospective restatement.
c
1
ACCT.WHAL.16.22.2 – LO: 22.2
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30. The Jack Company began its operations on January 1, 2016, and used the LIFO method of accounting for its
inventory. On January 1, 2018, Jack Company adopted FIFO in accounting for its inventory. The following
information is available regarding cost of goods sold for each method:
LIFO Cost of
FIFO Cost of
Year
Goods Sold
Goods Sold
2016
$470,000
$350,000
2017
690,000
450,000
2018
700,000
540,000
Assuming a tax rate of 35% and the same accounting change adopted for tax purposes, how would the effect of the
accounting change be reported in opening retained earnings on the 2018 financial statements?
a.
+$360,000 restatement
b.
+$234,000 restatement
c.
–$700,000 restatement
d.
no restatement
b
1
Moderate
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31. When disclosing the impact of a retrospective adjustment for the change from LIFO to FIFO in 2017, which of the
following impacts is not expected to be reported in the comparative financial statements when two-year comparative
statements are presented?
a.
impact on beginning inventory for 2016
b.
impact on 2016 net income
c.
impact on ending inventory for 2017
d.
impact on cost of goods sold for 2016
c
1
Easy
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32. When changing from LIFO to FIFO, the least likely result would be
a.
disclosing an increase in the inventory balance.
b.
disclosing an increase in the deferred taxes account.
c.
removing the LIFO reserve.
d.
obtaining a tax refund from the IRS.
d
1
Challenging
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33. The Bronson Company changed its method of determining inventories from LIFO to FIFO. This change represents a
a.
change in accounting estimate that should be treated prospectively.
b.
change in accounting principle that should be treated prospectively.
c.
change in accounting estimate for which the financial results of previous years are restated.
d.
change in accounting principle for which the financial statements of prior periods included for comparative
purposes are restated.
d
1
Easy
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34. Which of the following is an example of a change in accounting principle that is accounted for retrospectively?
a.
an Accounting Standards Update has been issued and a former principle is no longer generally accepted
b.
initial adoption of a generally accepted accounting principle because of events or transactions
occurring for the first time
c.
change to a generally accepted accounting principle from a principle that is not generally accepted
d.
modification of an accounting principle for transactions or events that are clearly different in substance from
those previously occurring
a
1
Easy
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35. In situations where the change in accounting principle has both direct and indirect effects on prior years’ income,
GAAP states that a company recognize
a.
only the direct effect retrospectively.
b.
the direct effect and discuss the indirect effect in the notes to the financial statements.
c.
only the indirect effect.
d.
the direct effect prospectively.
a
1
Easy
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Bloom’s: Remembering
36. Generally accepted methods of accounting for a change in accounting principle include
a.
restating prior years’ financial statements presented for comparative purposes.
b.
including the cumulative effect of the change in net income.
c.
prospective changes.
d.
making a prior-period adjustment.
a
1
ACCT.WHAL.16.22.2 – LO: 22.2
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37. If a company adopts a new accounting principle, it must justify the change on the grounds that the new principle
a.
increases the relevance of the financial statements.
b.
increases the reliability of the financial statements.
c.
is preferable to the old principle.
d.
increases the transparency of the financial statements.
c
1
Easy
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38. When applying retrospective adjustments, current GAAP requires the change to be applied so that it includes
a.
only the years disclosed in the currently published financial statements.
b.
all possible years.
c.
only the earliest possible date from which it can be applied prospectively.
d.
retroactive application for up to two years and prospective application for the remainder of the periods.
c
1
Moderate
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39. Arguments in favor of the retrospective application method include
a.
the adjustments to be made when reading the financial statements are easier to determine.
b.
a company’s current year’s earnings should not be penalized (decreased) by events beyond the control of
company’s management.
c.
all financial statements presented at a given date are consistent.
d.
evaluating financial statements is easier when all principles used are known by the reader.
c
1
Moderate
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40. Disadvantages of using the retrospective application method do not include which of the following?
a.
Numbers must be changed on previously released financial statements.
b.
The cost of determining the effect of the change may be greater than the benefits obtained from the increase in
comparability.
c.
It has possible impacts on contractual arrangements.
d.
All financial statements consistently apply the same revenue recognition principles.
d
1
Moderate
ACCT.WHAL.16.22.2 – LO: 22.2
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Bloom’s: Understanding
41. Betty Company began operations in 2016 and uses the average cost method in costing its inventory. In 2017, Betty is
investigating a change to the LIFO method. Before making that determination, Betty desires to determine what effect
such a change will have on net income. Betty has compiled the following information:
2016
2017
Ending Inventory using:
Average cost
$180,000
$200,000
LIFO
$180,000
110,000
Net income (computed using the average-
cost method)
120,000
170,000
Assume a 40% tax rate.
If Betty adopted LIFO in 2017, net income would be
a.
$80,000.
b.
$116,000.
c.
$170,000.
d.
$224,000.
b
1
Moderate
ACCT.WHAL.16.22.2 – LO: 22.2
United States – BUSPORG: Analytic
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42. The Max Company began its operations on January 1, 2016, and used an accelerated method of depreciation for its
machinery and equipment. On January 1, 2018, Max adopted the straight-line method of depreciation. The following
information is available regarding depreciation expense for each method:
Accelerated
Straight-line
Year
Depreciation
Depreciation
2016
$ 175,000
$ 150,000
2017
200,000
180,000
2018
245,000
230,000
What is the before-tax cumulative effect on prior years’ income that would be reported as of January 1, 2018, due to
changing to a different depreciation method?
a.
$0
b.
a decrease of $45,000
c.
an increase of $45,000
d.
an increase of $60,000
a
1
Moderate
ACCT.WHAL.16.22.3 – LO: 22.3
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Bloom’s: Analyzing
43. On January 1, 2016, Margo Company acquired machinery at a cost of $160,000. This machinery was being
depreciated by the double-declining-balance method over an estimated life of five years with no salvage value. At the
beginning of 2018, Margo changed to and could justify straight-line depreciation. Margo’s tax rate is 30 percent. What
is the amount of depreciation expense to be included in 2018 net income?
a.
$7,200
b.
$24,000
c.
$19,200
d.
$38,400
c
1
Moderate
ACCT.WHAL.16.22.3 – LO: 22.3
United States – BUSPORG: Analytic
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Bloom’s: Analyzing
44. On January 1, 2016, Roy Company acquired equipment at a cost of $500,000. Roy used the double-declining-balance
method to depreciate the equipment with a ten-year life and no salvage value. On January 1, 2018, Roy changed to
straight-line depreciation for this equipment, and the IRS accepted this change as being eligible as a change in
accounting estimate with prospective treatment. Assuming an income tax rate of 30%, what is the amount of the
restatement of January 1, 2018 retained earnings?
a.
$0
b.
$54,800
c.
$62,640
d.
$82,100
a
1
Moderate
ACCT.WHAL.16.22.3 – LO: 22.3
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Bloom’s: Analyzing
Exhibit 22-1
On January 1, 2016, the Chrissy Company purchased a machine for $450,000 with an estimate useful life of six years
and a $30,000 salvage value. Straight-line depreciation was used for financial reporting purposes and MACRS
depreciation for income tax reporting. Effective January 1, 2018, Chrissy switched to the double-declining-balance
depreciation method for financial statement reporting but not for income tax purposes. Chrissy can justify the change.
45. Refer to Exhibit 22-1. Assuming an income tax rate of 35%, what is the amount of cumulative effect change reported
in Chrissy’s 2018 income statement?
a.
$0
b.
$77,000
c.
$93,333
d.
$110,000
a
1
Moderate
ACCT.WHAL.16.22.3 – LO: 22.3
United States – BUSPORG: Analytic
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Bloom’s: Analyzing
46. Refer to Exhibit 22-1. Assuming an income tax rate of 35%, what is the amount of depreciation expense related to the
equipment reported in Chrissy’s 2018 income statement?
a.
$124,000
b.
$100,750
c.
$140,000
d.
$155,000
d
1
Moderate
ACCT.WHAL.16.22.3 – LO: 22.3
United States – BUSPORG: Analytic
Bloom’s: Analyzing
47. Brockmeyer, Inc. purchased some equipment on January 1, 2016, for $300,000 that had a five-year useful life and no
salvage value. Brockmeyer used double-declining-balance depreciation for both financial reporting and income tax
purposes. On January 1, 2018, Brockmeyer changed to the straight-line depreciation method for this equipment and
can justify the change. Brockmeyer will continue to use double-declining balance depreciation for income tax
reporting. Brockmeyer’s income tax rate is 30%. Assuming Brockmeyer’s 2018 income before depreciation and tax is
$800,000, what is the amount of Brockmeyer’s net income for 2018?
a.
$534,800
b.
$570,800
c.
$764,000
d.
$800,000
a
1
Moderate
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Bloom’s: Analyzing
48. On January 1, 2016, the Master Company purchased a machine for $36,000 that had a ten-year estimated useful life
and no estimated salvage value. At the start of the seventh year of use, a new energy saving device was added to the
machine that extended its original useful life an additional two years. This change in the seventh year should be
accounted for by
a.
including the cumulative effect of the change in net income for the current period.
b.
depreciating the remaining book value over four years.
c.
retroactively adjusting income of prior periods using the newly adjusted useful life.
d.
depreciating the remaining book value over six years.
d
1
Moderate
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Bloom’s: Understanding
49. Current GAAP requires a company to account for a change in accounting estimate that impacts multiple periods
during
a.
the period of change.
b.
the period of change and future periods.
c.
the period of change and past periods.
d.
the period of change, past periods, and future periods.
b
1
Easy
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Bloom’s: Remembering
50. Which of the following items would not be accounted for under current GAAP as a change in estimate?
a.
an increase in the expected life of a piece of manufacturing equipment
b.
a decrease in the estimated residual value of a delivery van
c.
a change from FIFO to LIFO for a small subsidiary
d.
an increase in defective items for the bestselling video game
c
1
Easy
ACCT.WHAL.16.22.3 – LO: 22.3
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
Bloom’s: Remembering
51. A change in accounting estimate is always accounted for
a.
using a prior period adjustment.
b.
retrospectively.
c.
using the cumulative effect method.
d.
prospectively.
d
1
Easy
ACCT.WHAL.16.22.3 – LO: 22.3
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering
52. A change in accounting estimate affected by a change in accounting principle should be reported as
a.
a change in accounting principle.
b.
a change in accounting estimate and a change in accounting principle.
c.
a change in accounting estimate.
d.
neither a change in accounting estimate nor a change in accounting principle.
c
1
Easy
ACCT.WHAL.16.22.3 – LO: 22.3
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Remembering