Junior Philippine Institute of Accountants

University of Cebu – Banilad Chapter

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

TEST BANK

Multiple Choice - Conceptual

1. How should the effect of a change in accounting estimate be accounted for?

a. By restating amounts reported in financial statements of prior periods

b. By reporting proforma amounts for prior periods
c. As a prior period adjustment to beginning retained earnings
d. In the period of change and future periods if the change affects both

2. Which of the following is characteristic of a change in accounting estimate?

a. It usually need not be disclosed

b. It does not effect the financial statements of prior period
c. It should be reported through the restatement of the financial statements
d. It makes necessary the reporting of proforma amounts for prior periods

3. A change in the periods benefited by a deferred cost because additional information

has been obtained is

a. An accounting change that should be reported in the period of change and future
periods if the change affects both
b. An accounting change that should be reported by restating the financial statements
of all prior periods presented
c. A correction of an error
d. Not an accounting change

4. A change in the residual value of an asset arising because additional information has
been obtained is

a. An accounting change that should be reported in the period of change and future
periods if the change affects both
b. An accounting change that should be reported by restating the financial statements of
all prior periods presented
c. A correction of an error
d. Not an accounting change

5. The effect of a change in accounting policy that is inseparable from the effect of a
change in accounting estimate should be reported

a. By restating the financial statements of all prior periods

b. As a correction of an error
c. As a component of income from continuing operations, in the period of change and
future periods if the change affects both
d. As a separate disclosure after income from continuing operations.

6. When an entity changed from the straight line method of depreciation to the double
declining balance method, which of the following should be reported?

a. Cumulative effect of change in accounting policy

b. Proforma effect of retroactive application
c. Prior period error
d. An accounting change that should be reported currently and prospectively

7. Which of the following is not a justification for a change in depreciation method?

a. A change in the estimated useful life

b. A change in the pattern of the estimated future benefit
c. To conform with the depreciation method prevalent in a particular industry
d. A change in the estimated future benefit

8. When an entity changed the expected service life of an asset, which of the following
should be reported?

a. Cumulative effect of change in accounting policy

b. Proforma effect of retroactive application
c. Prior period error
d. An accounting change that should be reported in the period of change and future
periods

9. Accounting changes are often made even though this may be a violation of the
accounting concept of

a. Materiality
b. Consistency
c. Prudence
d. Objectivity
10. Which is not classified as an accounting change?

a. Change in accounting policy

b. Change in accounting estimate
c. Error in the financial statements
d. All of these are classified as an accounting change

11. Which is the best explanation why accounting changes are classified into change in
accounting policy and change in accounting estimate?

a. The materiality of the change.

b. Each change involves different method of recognition in the financial statements.
c. The fact that some treatments are considered GAAP and some are not.
d. The need to provide a favorable profit picture.

12. Why is retrospective treatment of a change in accounting estimate prohibited?

a. Change in accounting estimate is a normal recurring correction or adjustment which

is the natural result of the accounting process.
b. The retrospective treatment for any type of presentation is not allowed.
c. Retrospective treatment of a change in accounting estimate is prohibited under
existing standard.
d. The existing standard is silent on the guidance

13. Which is the first step within the hierarchy of guidance when selecting accounting
policies?

a. Apply a standard from IFRS if it specifically relates to the transaction.

b. Apply the requirements in IFRS dealing with similar and related issue.
c. Consider the applicability of the definitions, recognition criteria and measurement
concepts in the Conceptual Framework.
d. Consider the most recent pronouncements of other standard setting bodies

14. In the absence of an accounting standard that applies specifically to a transaction,

what is the most authoritative source in developing and applying an accounting policy?

a. The requirement and guidance in the standard or interpretation dealing with similar
and related issue.
b. The definition, recognition criteria and measurement of asset, liability, income and
expense in the Conceptual Framework
c. Most recent pronouncement of other standard-setting body.
d. Accounting literature and accepted industry practice.
15. A change in accounting policy shall be made when

I. Required by law.
II. Required by an accounting standard or an interpretation of the standard.
III. The change will result in more relevant or reliable information about the financial
position, financial performance and cash flows of the entity.

a. I and III only

b. II and III only
c. I and II only
d. I, II and III

16. Why is an entity permitted to change an accounting policy?

a. The change would allow the entity to present a more favorable profit picture.
b. The change would result in the financial statements providing more reliable and
relevant information about financial position, financial performance and cash flows.
c. The change is made by the internal auditor.
d. The change is made by the CPA.

17. A change in accounting policy requires what kind of adjustment to the financial
statements?

a. Current period adjustment

b. Prospective adjustment
c. Retrospective adjustment
d. Current and prospective adjustment

18. A change in accounting policy requires that the cumulative effect of the change for
prior periods should be reported as an adjustment to

a. Beginning retained earnings for the earliest period presented

b. Net income for the period in which the change occurred.
c. Comprehensive income for the earliest period presented
d. Shareholders' equity for the period in which the change occurred.

19. Which of the following is accounted for as a change in accounting policy?

a. A change in the estimated useful life of property, plant and equipment

b. A change from cash basis to accrual basis of accounting
c. A change from expensing immaterial expenditures to deferring and amortizing them
when material
d. A change in inventory valuation from FIFO to average method
20. A change in accounting policy includes all of the following, except

a. The initial adoption of an accounting policy to carry asset at revalued amount.

b. The change from cost model to revaluation model in measuring property, plant and
equipment.
c. A change in the measurement basis.
d. A change from one method of depreciation to a different method of depreciation.

21. Which of the following should be treated as change in accounting policy?

a. A change is made in the method of calculating the provision for uncollectible accounts
receivable.
b. A change from cost model to fair value model in measuring investment property.
c. An entity engaging in construction contract for the first time needs on accounting
policy to deal with this.
d. All of these qualify as change in accounting policy.

22. When it is difficult to distinguish between a change in accounting estimate and a

change in accounting policy, the change is treated as

a. Change in accounting estimate with appropriate disclosure

b. Change in accounting policy
c. Correction of an error
d. Change in accounting estimate with no appropriate disclosure

23. An entity that changed an accounting policy voluntarily should

a. Inform shareholders prior to taking the decision.

b. Account for the change retrospectively.
c. Treat the effect of the change as a component of other comprehensive income.
d. Treat the change prospectively and adjust the effect of the change in the current
period and future periods.

24. Which statement best describes prospective application?

a. Recognizing a change in accounting policy in the current and future periods affected
by the change.
b. Correcting the financial statements as if a prior period error had never occurred.
c. Applying a new accounting policy to transactions occurring after the date at which the
policy is changed.
d. Applying a new accounting policy to transactions as if that policy had always been
applied.
25. Which term best describes applying a new accounting policy to transactions as if that
policy had always been applied?

a. Retrospective application
b. Retrospective restatement
c. Prospective application
d. Prospective restatement

26. This means correcting the recognition, measurement and disclosure of amounts of
elements of financial statements as if a prior period error had never occurred.

a. Retrospective application
b. Retrospective restatement
c. Prospective application
d. Prospective restatement

27. All of the following should be treated as a change in accounting policy, except

a. A new accounting policy of capitalizing development cost as a project has become

eligible for capitalization for the first time.
b. A new policy resulting from the requirement of a new IFRS.
c. To provide more relevant information, items of property, plant and equipment are
now being measured at fair value, whereas they had previously been measured at cost.
d. All of these qualify as change in accounting policy.

28. If it is impracticable to determine the cumulative effect of an accounting change to

any of the prior periods, the accounting change should be accounted for

a. As a prior period adjustment.

b. On a prospective basis.
c. As a cumulative effect change on the income statement.
d. As an adjustment to retained earnings

29. Where it is impracticable to determine the period-specific effect of the change on

comparative information for one or more prior periods presented, the retrospective
application or restatement is applied

a. Retrospectively only to the extent that it is practicable

b. Prospectively only to the extent it is practicable
c. Retrospectively to the extent that estimates can be made
d. Prospectively to the extent that estimates can be made
30. Applying a requirement of a Standard or an Interpretation is impracticable when the
entity cannot apply it after making every effort to do so. Which of the following is not
included in the definition of "impracticable"?

a. The effect of the retrospective application is not determinable.

b. The retrospective application requires assumptions about what management
intention would have been at the time.
c. The retrospective application requires significant estimate.
d. The entity would find the determination of the effect to be immaterial

31. When financial statements for a single year are being presented, a prior period error
should

a. Be shown as an adjustment of the balance of retained earnings at the start of the

current year
b. Affect net income of the current year
c. Be shown in the statement of changes in equity
d. Be included in other comprehensive incincom

32. Prior period errors

a. Do not include the effect of a mistake in the application of accounting policy.

b. Do not affect the presentation of prior period comparative financial statements.
c. Do not require further disclosure in the body of the financial statements,
d. Are reflected as adjustment of the opening balance of retained earnings of the earliest
period presented.

33. An example of a correction of an error in previously issued financial statements is a

change

a. From FIFO method of inventory valuation to the average method.

b. In the service life of property, plant and equipment.
c. From cash basis to accrual basis of accounting.
d. In the tax assessment related to a prior period.

34. An entity that changed from cash basis to accrual basis of accounting during the
current year should report

a. Prior period adjustment resulting from the correction of an error.

b. Prior period adjustment resulting from the change in accounting policy.
e. Component of income from continuing operations.
d. Component of income from discontinued operations.
35. An entity that changed from an accounting principle that is not generally accepted to
one that is generally accepted should report the effect of change, net of applicable income
tax, in the current

a. Income statement as component of income from continuing operations

b. Income statement as component of discontinued operations
c. Statement of retained earnings as an adjustment of the opening balance
d. Statement of retained earnings after net income but before dividends prior year was
understated.

36. During the current year, an entity discovered that ending inventory reported in the
financial statements for the account for this understatement?

a. Adjust the beginning inventory in the prior year.

b. Restate the financial statements with corrected balances for all periods presented.
c. Adjust the ending balance in retained earnings at current year-end.
d. Make no entry because the error will self-correct

37. On March 25, 2018, the entity discovered that depreciation expense for 2017 was
overstated. The 2017 financial statements were authorized for issue on April 1, 2018. What
must the entity do?

a. Correct the 2017 financial statements before issuing them.

b. Reduce depreciation for 2018.
c. Restate the depreciation expense reported for 2017 in the comparative figures of the
2018 financial statements.
d. Do nothing

38. On March 25, 2018, the entity discovered that depreciation expense for 2017 was
overstated. The 2017 financial statements were authorized for issue on March 1, 2018.
What must the entity do?

a. Reissue the 2017 financial statements with the correct depreciation expense.
b. Reduce depreciation for 2018.
c. Restate the depreciation expense reported for 2017 in the comparative figures of the
2018 financial statements.
d. Do nothing

39. A change in reporting entity is actually a change in

a. Accounting policy
b. Accounting estimate
c. Accounting method
d. Accounting concept

40. Which of the following does not represent a change in reporting entity?

a. Changing the entities included in combined financial statements

b. Disposition of a subsidiary or other business unit
c. Presenting consolidated statements in place of the statements of individual entities
d. Changing specific subsidiaries that constitute the group of entities for which
consolidated financial statements are presented.

ANSWERS:

Multiple Choice - Conceptual

1. D 11. B 21. B 31. A

2. B 12. A 22. A 32. D
3. A 13. A 23. B 33. C
4. A 14. A 24. C 34. A
5. C 15. B 25. A 35. C
6. D 16. B 26. B 36. B
7. C 17. C 27. A 37. A
8. D 18. A 28. B 38. C
9. B 19. D 29. A 39. A
10. C 20. D 30. D 40. B