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C249 CH22
Accounting Errors
| Question | Answer |
|---|---|
| True or False: Mathematical mistakes or the oversight or misuse of facts that existed when preparing the financial statements will often result in errors. | True |
| All of the following are inclued in the three types of accounting changes, EXCEPT: change in the estimated useful life of an asset. change in reporting entity. correction of understated depreciation expense in a prior period. | correction of understated depreciation expense in a prior period. |
| What are the 3 types of accounting changes? | Change in accounting principle, change in accounting estimate, change in reporting entity |
| What is a change in accounting principle? | A change from one generally accepted accounting principle to another one. |
| What is a change in accounting estimate? | A change that occurs as the result of new information or additional experience. |
| What is a change in reporting entity? | A change from reporting as one type of entity to another type of entity. |
| Accounting changes are often made and the monetary impact is reflected in the financial statements of a company. However, in theory, this may be a violation of which of the following accounting concepts? | consistency |
| Which of the following is true of the enhancing characteristics of comparability and consistency? | Changes in accounting can negatively impact these characteristics. |
| Changes in accounting can negatively affect both comparability and __________________________ . | Consistency |
| Jonathan’s company decides to change their valuation method from LIFO, which they have used for the past 10 years, to average-cost. What type of change is this? | change in accounting principle |
| The FASB established a reporting framework that includes three types of ___________________ changes. | Accounting |
| Pam’s company orginally estimated the useful life of a machine to be five years. However, they have recently changed that estimate to six years. What type of change is this? | change in accounting estimate |
| What are the 3 ways of reporting changes in accounting principles? | current, retrospective, prospective |
| The _____________ effect represents the change in prior years' income after a new accounting method has been implemented. | cumulative |
| True or False: When adopting a new principle in recognition of events that have occurred for the first time, or those that were previously immaterial, the event is treated as an accounting change. | False |
| Reporting changes in the future is referred to as reporting changes ________. | prospectively |
| The approach required by the FASB when accounting for changes in accounting principle is | retrospectively |
| The cumulative effect of a change in accounting principle is reported how? | On the retained earnings statement as an adjustment to the beginning balance of the earliest year presented |
| What occurs as a result of the current approach? | Loss of comparability |
| True or False: When the application of a different accounting principle occurs in order to recast previously issued financial statements—as if the new principle had always been used—it is referred to as a retrospective application. | True |
| A new accounting method has been adopted by Trist Company. Which of the following would be the correct term for the difference between prior years' income with the new method and prior years' income determined by the old method? | cumulative effect |
| True or False: Companies must show the cumulative effect of the change in the current year’s income statement in order to report changes of an accounting principle. | False |
| ___________ effects do not change prior period amounts. | Indirect |
| If a company changes an accounting principle, then that company needs to report the change using _____________ application. | Retrospective |
| After changing its inventory valuation method, a company would modify the assets, liabilities, and _____________ earnings on their financial statements. | Retained |
| If the inventory balance for a company changes due to a change in the inventory valuation method, then this would be a(n) ___________ effect. | Direct |
| Which of the following does the IFRS not address in terms of accounting changes? how to report a change in principle the disclosure of direct effects the disclosure of indirect effects how to note adjustments in retained earnings | The disclosure of indirect effects |
| Which of the following contibutes to international accounting convergence? adoption of the cumulative effect adoption of the prospective approach adoption of the cumulative effect approach adoption of the retrospective approach | adoption of the retrospective approach |
| After making an accounting change, which of the following would NOT be included in a note to the financial statements? the change was made nature of the change made years affected by the change increase in assets related to the change | the increase in assets related to the change |
| True or False: Showing the cumulative effect of the change on retained earnings as of the beginning of the earliest period presented, is one of the requirements for a change in accounting principle. | True |
| Which effect needs to be shown when considering a change in accounting principles? | cumulative effect in retained earnings |
| In order to change from LIFO to FIFO the required disclosures would be not include: the cumulative effect as of the eariliest year presented, net of tax, in the current retained earnings statement. or retrospective treatment of indirect effects | retrospective treatment of indirect effects |
| True or False: Only two conditions exist in regards to retrospective application, and if either of them are met, then retrospective application should NOT be used. | False, 3 |
| The costs of raw materials, labor, and overhead are all included in___________ | Inventory |
| True or False: If a company cannot determine the prior period effects using every reasonable effort, then the retrospective application is considered impracticable. | True |
| Lara’s company has determined that it will be impracticable to apply the retrospective approach for their swtich from FIFO to LIFO. What will be the result of this situation? | The company will need to prospectively apply the new accounting principle in the earliest period, and they will need to disclose why they did not include calculations for the cumulative effect. |
| When prior period effects cannot be determined, which of the following should NOT be used? the prospective approach retrospective application FIFO LIFO | retrospective application |
| If retrospective application of a change in accounting principle requires assumptions about management’s intent in a prior period, then the approach that should be used to account for the change is | Prospective. |
| Which of the following is true of a change to LIFO inventory valuation from any other acceptable inventory valuation method? | it requires no restatement of prior years’ income |
| If retrospective application is considered impracticable, then it means that | retrospective application should not be used. |
| Fulton Company changed its method of pricing inventories from FIFO to LIFO. This represents a change in accounting | principle for which the financial statements for prior periods included for comparative purposes should be presented as previously reported. |
| When a company decides to switch from the double-declining balance method to the straight-line method, this change should be handled as which of the following? | a change in accounting estimate |
| True or False: Changes in accounting estimates are reported retrospectively by companies. | False |
| Which of the following does NOT require an estimate? uncollectable receivables periods not benefited by deferred costs changes in depreciation methods recoverable mineral resources | periods not benefited by deferred costs |
| The proper time period(s) to record the effects of a change in accounting estimate would be | the current period and prospectively. |
| All of the following statements are incorrect, EXCEPT that | |
| True or False: the process of revising previously issued financial statements to reflect the correction of an error is called reassessment. | False |
| Which of the following is used for changes in reporting entities? | Retrospective |
| Sylva’s company made some changes by using the current and prospective approach. The changes will involve ensuring that the prior period financial statements are presented as previously reported. Which of the following changes is this an example of? | Change in accounting estimate |
| When reviewing their accounts, the Yanos Company discovered that in the previous year there had been improper treatment of tax liabilities. They will now need to make accounting changes. What is this an example of? | Changes due to an error |
| Which of the following is true of an error involving the misclassification of balances on a financial statement? | It is not as significant to investors as other errors. |
| Improper _____________ recognition involves the recording of an expense at the wrong amount and in the incorrect period. | Exense |
| In 2013, PWT Company failed to record depreciation expense on some of its assets. When the error is discovered in 2014, it will be accounted for in which of the following ways? | as a prior period adjustment |
| When the current year’s net income is understated, it is always the result of understating ending inventory. True or False? | False |
| When changes are made due to an ____________, the restatement approach should be used. | error |
| Corrections of errors from prior periods are generally recorded as an adjustment to the ending balance of net earnings. True or False? | False, beginning balance of retained earnings |
| What is an example of a correction of an error in previously issued financial statements? | Change from bad accounting principle to good one Math mistakes An oversight A misuse of facts Incorrect classification of costs Change in estimate because journal wasn't made in good faith |
| True or False: The change is considered clearly acceptable, if an FASB standard creates a new principle, expresses preference for, or rejects a specific accounting principle. | True |
| Which of the following is NOT an accounting error? A changes in acceptable accounting principles B incorrect classification of costs C mathematical mistakes D misuse of facts | changes in acceptable accounting principles |
| When EPS or restricted stock are improperly accounted for, it affects _________ —other. | Equity |
| The retrospective approach is used in cases where there are changes made to ________________ entities. | Reporting |
| Which of the following is the LEAST significant error that can occur on a financial statement? A overstating assets B overstating income C misclassification of balances D understating liabilities | misclassification of balances |
| Which of the following accounting principles is violated when expenses are recorded in the wrong period and at the wrong amount? | expense recognition |
| The term __________ is used to identify the process of revising financial statements that were previously issued in order to correct an error that occurred. | restatemet |
| Which of the following is used for changes due to error? | the restatement approach |
| True or False: Changes in estimates that occur because a company acquires more experience, or as it obtains additional information, are known as accounting errors. | False |
| Companies record corrections of errors from prior periods as an adjustment to the beginning balance of _________________ earnings in the current period. | Retained |
| True or False: A restatement of the beginning retained earnings balance comes as a result of changes due to an error. | True |
| A company would account for a failure to record depreciation expense in a prior year as a prospective change. True or False? | False |
| How should failure to record depreciation expense in a given year be accounted for? | As a prior period adjustment |
| Mathematical mistakes, misuse of facts, and incorrect classification of costs are all examples of ______________ errors. | Accounting |
| No entry will be required for an error if the books have already closed and the error is already _____________________. | Counterbalanced |
| Counterbalancing errors include inventory errors. True or False> | True |
| Neither the balance sheet nor _____________ _________________ are impacted by an income statement classification error. | |
| Which of the following does NOT involve counterbalancing errors? the understatement of inventory the failure to record prepaid expenses the overstatement of purchases the failure to adjust for bad debts | Failure to adjust for bad debts |
| Which of the following does NOT involve a counterbalancing error? the failure to record depreciation the overstatement of ending inventory the understatement of purchases the failure to record prepaid expenses | the failure to record depreciation |
| Which of the following is NOT a question companies need to ask during error analysis? What type of error is it? How are financial statements to be restated? What is the prospective amount? What entries are needed to correct for the error? | What is the prospective amount? |
Created by:
tbeeche