ACCOUNTING ESTIMATES

A change in accounting policy is a change that occurs as the result of new

FALSE
information or additional experience.
Errors in financial statements result from mathematical mistakes or oversight or
TRUE
misuse of facts that existed when preparing the financial statements.
Adoption of a new policy in recognition of events that have occurred for the first
FALSE
time or that were previously immaterial is treated as an accounting change.
Retrospective application refers to the application of a different accounting policy
TRUE to recast previously issued financial statements—as if the new policy had always
been used.
When a company changes an accounting policy, it should report the change by
FALSE reporting the cumulative effect of the change in the current year’s income
statement.
One of the disclosure requirements for a change in accounting policy is to show
TRUE the cumulative effect of the change on retained earnings as of the beginning of
the earliest period presented.
An indirect effect of an accounting change is any change to current or future cash
TRUE flows of a company that result from making a change in accounting policy that is
applied retrospectively.
The IASB is silent on the application of the direct effects of a change in
FALSE
accounting policy.
The new IFRS on financial instruments will be subject to the proper accounting for
TRUE
changes in accounting policy.
The requirements for disclosure are the same whether a change is voluntary or is
FALSE
mandated by the issuance of a new IFRS.
Under U.S. GAAP, the impracticality exception applies both to changes in
FALSE
accounting policies and to the correction of errors.
Retrospective application is considered impracticable if a company cannot
TRUE
determine the prior period effects using every reasonable effort to do so.
FALSE Companies report changes in accounting estimates retrospectively.
When it is impossible to determine whether a change in policy or change in
TRUE
estimate has occurred, the change is considered a change in estimate.
Companies account for a change in depreciation methods as a change in
FALSE
accounting policy.
Accounting errors include changes in estimates that occur because a company
FALSE
acquires more experience, or as it obtains additional information.
Companies record corrections of errors from prior periods as an adjustment to the
TRUE
beginning balance of retained earnings in the current period.
If an IASB standard creates a new policy, expresses preference for, or rejects a
TRUE
specific accounting policy, the change is considered clearly acceptable.
 ACCOUNTING ESTIMATES

Statement of financial position errors affect only the presentation of an asset or

FALSE
liability account.
Counterbalancing errors are those that will be offset and that take longer than two
FALSE
periods to correct themselves.
For counterbalancing errors, restatement of comparative financial statements is
TRUE
necessary even if a correcting entry is not required.
Companies must make correcting entries for non-counterbalancing errors, even if
TRUE
they have closed the prior year’s books.
An income statement classification error has no effect on the statement of
TRUE
financial position and no effect on net income.
FALSE The accounting for change in estimates differs between U.S. GAAP and IFRS.
Non-counterbalancing errors are those that longer than two periods to correct
TRUE
themselves.
The three main categories of accounting changes are change in estimate, change
FALSE
in principle, and correction of prior period errors.
FALSE Pro forma statements should be prepared for a change in accounting estimate.
Changes in accounting estimates are considered to be part of the normal
TRUE
accounting process and not corrections or changes of past periods.
A change in the percentage used in determining uncollectible accounts receivable
FALSE
is a change in accounting principle.
A change from a principle that is not generally accepted to one that is generally
TRUE
accepted is considered to be a correction of an error.
A change in accounting principle, as defined in APB Opinion No. 20, includes the
FALSE initial adoption of an accounting principle as a result of transactions or events that
had not occurred in previous periods.
In most cases, the effect of a change from one accepted accounting principle to
TRUE another is reflected by reporting the cumulative effect of the change in the income
statement.
A change from FIFO to LIFO is a change in accounting principle requiring
FALSE
restatement of prior period financial statements.
A change from LIFO to FIFO is a change in accounting principle requiring
TRUE
restatement of prior period financial statements.
Pro forma amounts disclosed under the cumulative effect method should include
TRUE nondiscretionary adjustments that would have been recognized if newly adopted
accounting principles had been followed in prior periods.
The cumulative effect of a change from double-declining-balance to straight-line
TRUE depreciation is properly reported on the income statement immediately before net
income (loss).
 ACCOUNTING ESTIMATES

FALSE A change in reporting entity is considered a change in accounting principle.

If an asset is affected by both a change in estimate and a change in principle, the
FALSE
change is treated as a change in principle as required by APB Opinion No. 20.
A change in reporting entity must be adjusted retroactively to disclose what the
TRUE statements would have looked like if the current entity had been in existence in
the prior years.
If a change in accounting principle is caused by a new pronouncement by an
FALSE authoritative accounting body, the cumulative effect must be reported by
retroactive restatement.
Accounting errors made in prior years that have not already “counterbalanced” are
TRUE
reported as prior period adjustments and recorded directly to Retained Earnings.
The understatement of merchandise inventory is an example of an error that
TRUE
counterbalances after two years.
Pro forma income information is required when prior period financial statements
FALSE
are restated for a change in accounting principle.
TRUE Failure to record amortization is an example of a non-counterbalancing error.
The primary distinction between a change in accounting estimate and the
TRUE correction of an error is the timing of availability of information; a change in
estimate is based on new information not previously available.

A. Prior period adjustment

B. Change in reporting entity
C. Change in accounting estimate
D. Change in accounting principle--retroactive
E. Cumulative effect of change in accounting principle

D 1. A company switches from LIFO to a FIFO inventory valuation during the current
period.
A 2. The computation of depreciation for 1993 was overstated by 96,500. The mistake
was discovered in 1997.
B 3. A company changes from presenting nonconsolidated to consolidated financial
statements.
E 4. A company changes its depreciation method for machinery and equipment from
 ACCOUNTING ESTIMATES

sum-of-the-years’-digits depreciation to the straight-line method.

C 5. A company reduces the lives of several patents from 17 to 10 years because of
rapid technological change.
D 6. A company changes from the completed-contract to percentage-of-completion
method for recognizing income.
E 7. During the current year, a company adopted the inventory costing rules under the
Tax Reform Act of 1986 for financial reporting purposes. Such rules require including
in inventories certain costs that had previously been expensed when incurred.
C 8. An analysis of the allowance for doubtful accounts showed the balance should be
reduced by $27,500 due to recent changes in economic conditions.
A 9. A company changes from a nonacceptable to an acceptable accounting principle.
C 10 A company changes its depreciation method at the same time it recognizes a
. change in the estimated useful life of the asset.
B 11 A company includes all majority owned subsidiaries in its consolidated financial
. statements in accordance with FASB Statement No. 94. In previous years, the
company had included only wholly owned subsidiaries in its consolidated financial
statements.
A 12 A company deliberately understated various expenses in order to present higher net
. incomes in the previous three years.

a. Change in accounting policy.

b. Change in accounting estimate.
c. Error correction.

c. 1. Change due to understatement of inventory.

c. 2. Change due to charging a new asset directly to an expense account.
b 3. Change from expensing to capitalizing certain costs, due to a change in periods
. benefited.
a 4. Change from FIFO to average-cost inventory procedures.
.
c. 5. Change due to failure to recognize an accrued (uncollected) revenue.
b 6. Change in amortization period for an intangible asset.
.
b 7. Change in expected recovery of an account receivable.
 ACCOUNTING ESTIMATES

.
b 8. Change in the loss rate on warranty costs.
.
c. 9. Change due to failure to recognize and accrue income.
b 10. Change in residual value of a depreciable plant asset.
.
c. 11. Change from an unacceptable to an acceptable accounting policy.
b 12. Change in both estimate and acceptable accounting policies.
.
c. 13. Change due to failure to recognize a prepaid asset.
b 14. Change from straight-line to sum-of-the-years'-digits method of depreciation.
.
b 15. Change in life of a depreciable plant asset.
.
a 16. Change from one acceptable policy to another acceptable policy.
.

a. Change in estimate
b. Prior period adjustment (not due to change in principle)
c. Retrospective type accounting change with note disclosure
d. None of the above

c. 1. In 2016, the company changed its method of recognizing income from the cost-
recovery method to the percentage-of-completion method.
a 2. At the end of 2016, an audit revealed that the corporation's allowance for doubtful
. accounts was too large and should be reduced to 2%. When the audit was made in
2015, the allowance seemed appropriate.
b 3. Depreciation on a truck, acquired in 2013, was understated because the useful life
. had been overestimated. The understatement had been made in order to show
higher net income in 2014 and 2015.
c. 4. The company switched from an average-cost to a FIFO inventory valuation method
during the current year.
 ACCOUNTING ESTIMATES

a 5. In the current year, the company decides to change from expensing certain costs to
. capitalizing these costs, due to a change in the period benefited.
d 6. During 2016, a long-term bond with a carrying value of $3,600,000 was retired at a
. cost of $4,100,000.
a 7. After negotiations with the taxing authority, income taxes for 2014 were established
. at $42,900. They were originally estimated to be $28,600.
d 8. In 2016, the company incurred interest expense of $29,000 on a 20-year bond
. issue.
b 9. In computing the depreciation in 2014 for equipment, an error was made which
. overstated income in that year $75,000. The error was discovered in 2016.
a 10. In 2016, the company changed its method of depreciating plant assets from the
. double-declining balance method to the straight-line method.