Mastercard45

1.How should a company report its decision to change from a cash-basis to an accrual-basis of accounting?

  1. As a change in accounting principle, requiring the cumulative effect of the change (net of tax) to be reported in the income statement.
  2. Prospectively, with no amounts restated and no cumulative adjustment.
  3. As an extraordinary item (net of tax).
  4. As a Prior period, adjustment (net of tax), by adjusting the beginning balance of retained earnings.

2. Lore Co. changed from the cash basis to the accrual basis of accounting during 2005. The cumulative effect of this change should be reported in Lore’s 2005 financial statements as a

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  1. Prior period adjustment resulting from the correction of an error.
  2. Prior period adjustment resulting from the change in accounting principle.
  3. Adjustment to retained earnings for an accounting principal change.
  4. Component of income after extraordinary item.

3. During Year 5, Orca Corp. decided to change from the FIFO method of inventory valuation to the weighted-average method. Inventory balances under each method were as follows:

FIFO Weighted-average

January 1, Year 5 $71,000 $77,000

December 31, Year 5 $79,000 $83,000

Orca’s income tax rate is 30%.

In its Year 5 financial statements, what amount should Orca report as the cumulative effect of this accounting change?

  1. $2,800
  2. $4,000
  3. $4,200
  4. $6,000

4. Which of the following statements is correct as it relates to changes in accounting estimates?

  1. Most changes in accounting estimates are accounted for retrospectively.
  2. Whenever it is impossible to determine whether a change in an estimate or a change in accounting principle occurred, the change should be considered a change in principle.
  3. Whenever it is impossible to determine whether a change in accounting estimate or a change in accounting principle has occurred, the change should be considered a change in estimate.
  4. It is easier to differentiate between a change in accounting estimate and a change in accounting principle than it is to differentiate between a change in accounting estimate and a correction of an error.

5. The senior accountant for Carlton Co., a public company with a complex capital structure, has just finished preparing Carlton’s income statement for the current fiscal year. While reviewing the income statement, Carlton’s finance director noticed that the earnings-pershare data have been omitted. What changes will have to be made to Carlton’s income statement as a result of the omission of the earnings-per-share data?

  1. No changes will have to be made to Carlton ’s income statement. The income statement is complete without the earnings-per-share data.
  2. Carlton’s income statement will have to be revised to include the earnings-per-share data.
  3. Carlton’s income statement will only have to be revised to include the earnings-per-share data if Carlton’s market capitalization is greater than $5mn.
  4. Carlton’s income statement will only have to be revised to include the earnings-per-share data if Carlton’s net income for the past two years is greater than $5mn.

6. Cuthbert Industrials, Inc. prepares three-year comparative financial statements. In year 3, Cuthbert discovered an error in the previously issued financial statements for year 1. The error affects the financial statements that were issued in years 1 and 2. How should the company report the error?

a. The financial statements for years 1 and 2 should be restated; an offsetting adjustment to the cumulative effect of the error should be made to the comprehensive income in the year 3 financial statements.

b. The financial statements for years 1 and 2 should not be restated; financial statements for year 3 should disclose the fact that the error was made in prior years.

c. The financial statements for years 1 and 2 should not be restated; the cumulative effect of the error on years 1 and 2 should be reflected in the carrying amounts of assets and liabilities as of the beginning of year 3.

d. The financial statements for years 1 and 2 should be restated; the cumulative effect of the error on years 1 and 2 should be reflected in the carrying amounts of assets and liabilities as of the beginning of year 3.

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