QUESTION: 29

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):

Adjustment to beginning retained earnings.
Component of income from continuing operations.
Extraordinary item.
Component of income after extraordinary items.

Answer(s): A

Explanation:

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.

Reveal Solution Next Question

QUESTION: 30

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

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

Answer(s): D

Explanation:

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.

Reveal Solution Next Question

QUESTION: 31

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

By restating amounts reported in financial statements of prior periods.
By reporting pro forma amounts for prior periods.
As a prior period adjustment to beginning retained earnings.
In the period of change and future periods if the change affects both.

Answer(s): D

Explanation:

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.

Reveal Solution Next Question

QUESTION: 32

Foy Corp. failed to accrue warranty costs of $50,000 in its December 31, 1992, financial statements. In addition, a $30,000 change from straight-line to accelerated depreciation was made at the beginning of 1993. Both the $50,000 and the $30,000 are net of related income taxes. What amount should Foy report as prior period adjustments in 1993?

$0
$30,000
$50,000
$80,000

Answer(s): C

Explanation:

Choice "c" is correct. $50,000.
The cumulative effect of a change in accounting principle is now shown on the retained earnings statement as an adjustment to the beginning balance of retained earnings, assuming that the cumulative effect can be calculated.
An exception is made however, for a change in depreciation method, since a change in depreciation method is no longer considered to be a change in accounting principle. A change in depreciation method is now considered to be both a change in method and a change in estimate. These changes should now be accounted for as a change in estimate and handled prospectively. The new depreciation method should be used as of the beginning of the year of change and should start with the current book value of the underlying asset. No retroactive or retrospective calculations should be made, and no adjustment should be made to retained earnings. The correction of the failure to accrue warranty costs is treated as a correction of an error and thus as a prior period adjustment.
Choices "a", "b", and "d" are incorrect, per the above .

Reveal Solution Next Question

CPA Financial Accounting and Reporting CPA-Financial Exam

QUESTION: 29

Explanation:

QUESTION: 30

Explanation:

QUESTION: 31

Explanation:

QUESTION: 32

Explanation:

CPA Financial Accounting and Reporting
CPA-Financial Exam