Test Prep Test Prep Certifications FINANCIAL-ACCOUNTING-AND-REPORTING Questions & Answers

• Question 121:

  In which of the following situations should a company report a prior-period adjustment?

  A. A change in the estimated useful lives of fixed assets purchased in prior years.

  B. The correction of a mathematical error in the calculation of prior years' depreciation.

  C. A switch from the straight-line to double-declining balance method of depreciation.

  D. The scrapping of an asset prior to the end of its expected useful life.

  Correct Answer: B

  Choice "b" is correct. Prior period adjustments consist of: corrections of errors in the financial statements of

  prior periods, retroactive restatements required by new GAAP pronouncements, and changes from a non-

  GAAP method of accounting to a GAAP method of accounting (which are corrections of errors).

  Choice "a" is incorrect. This change is a change in accounting estimate.

  Choice "c" is incorrect. This change is a change for one GAAP method of depreciation to another GAAP

  method of depreciation. Under SFAS No. 154, it is treated as a change in accounting estimate effected by

  a change in accounting principle and is handled prospectively, and not as a prior-period adjustment.

  Choice "d" is incorrect. This is a business activity ordinary in nature.

• Question 122:

  If a company is not presenting comparative financial statements, the correction of an error in the financial statements of a prior period should be reported, net of applicable income taxes, in the current:

  A. Retained earnings statement after net income but before dividends.

  B. Retained earnings statement as an adjustment of the opening balance.

  C. Income statement after income from continuing operations and before extraordinary items.

  D. Income statement after income from continuing operations and after extraordinary items.

  Correct Answer: B

  Choice "b" is correct. The correction of an error in the financial statements of a prior period should be

  reported, net of tax, in the current statement of retained earnings as an adjustment of the opening balance.

  Choice "a" is incorrect. The adjustment is before net income, not after net income.

  Choices "c" and "d" are incorrect. Corrections of errors of prior periods go to retained earnings and do not

  affect the income statement.

• Question 123:

  The cumulative effect of a change in accounting estimate should be shown separately: A. On the income statement above income from continuing operations.

  B. On the income statement after income from continuing operations and before extraordinary items.

  C. On the retained earnings statement as an adjustment to the beginning balance.

  D. It should not be recorded separately on any financial statement.

  Correct Answer: D

  Choice "d" is correct. A change in estimate is handled prospectively. No cumulative effect adjustment is

  made and no separate line item presentation is made on any financial statement. If a material change is

  being made, appropriate footnote disclosure is necessary.

  Choices "a", "b", and "c" are incorrect, per the above Explanation: .

• Question 124:

  The following costs were incurred by Griff Co., a manufacturer, during 1992:

  

  What amount of these costs should be reported as general and administrative expenses for 1992?

  A. $260,000

  B. $550,000

  C. $635,000

  D. $810,000

  Correct Answer: A

  Choice "a" is correct. General and administrative expenses include:

  

  Freight-in is part of cost of sales; freight-out is a selling expense; and sales salaries are selling expenses. Choice "b" is incorrect. Freight-in is part of cost of inventory; freight-out is a selling expense; and sales salaries are selling expenses. Choice "c" is incorrect. Freight-in is part of cost of inventory; freight-out is a selling expense; and sales salaries are selling expenses. Choice "d" is incorrect. Freight-in is part of cost of inventory; freight-out is a selling expense; and sales salaries are selling expenses.

• Question 125:

  On January 2, 1989, Union Co. purchased a machine for $264,000 and depreciated it by the straight-line method using an estimated useful life of eight years with no salvage value. On January 2, 1992, Union determined that the machine had a useful life of six years from the date of acquisition and will have a salvage value of $24,000. An accounting change was made in 1992 to reflect the additional data. The accumulated depreciation for this machine should have a balance at December 31, 1992, of:

  A. $176,000

  B. $160,000

  C. $154,000

  D. $146,000

  Correct Answer: D

  Choice "d" is correct, $146,000 accumulated depreciation balance at DeC. 31, 1992.

  

• Question 126:

  During 1992, Krey Co. increased the estimated quantity of copper recoverable from its mine. Krey uses the units of production depletion method. As a result of the change, which of the following should be reported in Krey's 1992 financial statements?

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: C

  Choice "c" is correct, No - No. This is a change in "accounting estimate," which affects only the current and subsequent periods (not prior periods and not retained earnings). "Cumulative effect of a change in accounting principle" is only used for changes in "accounting principle."

• Question 127:

  On November 1, 20X2, Smith Co. contracted to dispose of an industry segment. Throughout 20X2 the segment had operating losses. These losses were expected to continue until the segment's disposition. If a loss is projected on final disposition, how much of the operating losses should be included in the loss from discontinued operations reported in Smith's 20X2 income statement?

  I. Operating losses for the period January 1 to October 31, 20X2.

  II. Operating losses for the period November 1 to December 31, 20X2.

  III.

  Estimated operating losses for the period January 1 to February 28, 20X3.

  A.

  II only.

  B.

  II and III only.

  C.

  I and III only.

  D.

  I and II only.

  Correct Answer: D

  Choice "d" is correct. The operating losses to be included in Smith's 20X2 income statement would be the total 20X2 operating losses, regardless of whether those losses occurred before or after the date the decision to dispose of the component was made, and not any 20X3 operating losses. Projected operating losses are not anticipated and accrued. Choice "a" is incorrect. The operating losses to be included in Smith's 20X2 income statement would be the total 20X2 operating losses, regardless of whether those losses occurred before or after the date the decision to dispose of the component was made, and not any 20X3 operating losses. Choice "b" is incorrect. The operating losses to be included in Smith's 20X2 income statement would be the total 20X2 operating losses, regardless of whether those losses occurred before or after the date the decision to dispose of the component was made, and not any 20X3 operating losses. Choice "c" is incorrect. The operating losses to be included in Smith's 20X2 income statement would be the total 20X2 operating losses, regardless of whether those losses occurred before or after the date the decision to dispose of the component was made, and not any 20X3 operating losses.

• Question 128:

  During 1994, Orca Corp. decided to change from the FIFO method of inventory valuation to the weightedaverage method. Inventory balances under each method were as follows:

  

  Orca's income tax rate is 30%.

  Orca should report the cumulative effect of this accounting change as a(n):

  A. Adjustment to beginning retained earnings.

  B. Component of income from continuing operations.

  C. Extraordinary item.

  D. Component of income after extraordinary items.

  Correct Answer: A

  Choice "a" is correct. The cumulative effect of a change in accounting principle is shown as an adjustment to beginning retained earnings. Choice "b" is incorrect. The cumulative effect of a change in accounting principle is now presented as a separate category on the retained earnings statement and is not a component of net income. Choice "c" is incorrect. Extraordinary items are unusual and infrequent in nature. Extraordinary items have nothing to do with changes in accounting principle. Choice "d" is incorrect. A change in accounting principle affects retained earnings, not the income statement, under SFAS No. 154.

• Question 129:

  A transaction that is unusual in nature and infrequent in occurrence should be reported separately as a component of income:

  A. After cumulative effect of accounting changes and before discontinued operations of a segment of a business.

  B. After cumulative effect of accounting changes and after discontinued operations of a segment of a business.

  C. Before cumulative effect of accounting changes and before discontinued operations of a segment of a business.

  D. After discontinued operations of a segment of a business.

  Correct Answer: D

  Choice "d" is correct. An extraordinary item (a transaction that is both "unusual in nature" and "infrequent in

  occurrence") should be reported separately as a component of income after discontinued operations of a

  segment of a business.

  The cumulative effect of a change in accounting principle is shown on the retained earnings statement.

  This is why memorizing the mnemonic "idea" is so important.

• Question 130:

  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 pro forma 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.

  Correct Answer: D

  Choice "d" is correct, a "change in accounting estimate" affects only the current and subsequent (future)

  periods, if the change affects both. It does not affect "prior periods," nor "retained earnings." Choice "a" is

  incorrect. Restating prior years' financial statements is required when comparative financial statements are

  shown for prior period adjustments of "corrections of errors," "changes in entities," and changes in

  accounting principle.

  Choices "b" and "c" are incorrect. A "change in accounting estimate" does not affect prior periods.