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

• Question 11:

  On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with

  Quo's president and outside accountants, made changes in accounting policies, corrected several errors

  dating from 1992 and before, and instituted new accounting policies.

  Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.

  This question represents one of Quo's transactions. List B represents the general accounting treatment

  required for these transactions. These treatments are:

  •

  Cumulative effect approach - Include the cumulative effect of the adjustment resulting from the accounting change or error correction in the 1993 financial statements, and do not restate the 1992 financial statements.

  •

  Retroactive or retrospective restatement approach - Restate the 1992 financial statements and adjust 1992 beginning retained earnings if the error or change affects a period prior to 1992.

  •

  Prospective approach - Report 1993 and future financial statements on the new basis but do not restate 1992 financial statements.

  Item to Be Answered As a result of a production breakthrough, Quo determined that manufacturing equipment previously depreciated over 15 years should be depreciated over 20 years.

  List B (Select one)

  A. Cumulative effect approach.

  B. Retroactive or retrospective restatement approach.

  C. Prospective approach.

  Correct Answer: C

  Choice "C" is correct. This affects only the prospective (current and subsequent) periods - not prior periods, not retained earnings.

• Question 12:

  On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with Quo's president and outside accountants, made changes in accounting policies, corrected several errors

  dating from 1992 and before, and instituted new accounting policies.

  Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.

  This question represents one of Quo's transactions. List A represents possible clarifications of these

  transactions as: a change in accounting principle, a change in accounting estimate, a correction of an error

  in previously presented financial statements, or neither an accounting change nor an accounting error.

  Item to Be Answered

  The equipment that Quo manufactures is sold with a five-year warranty. Because of a production

  breakthrough, Quo reduced its computation of warranty costs from 3% of sales to 1% of sales.

  List A (Select one)

  A. Change in accounting principal.

  B. Change in accounting estimate.

  C. Correction of an error in previously presented financial statements.

  D. Neither an accounting change nor an accounting error.

  Correct Answer: B

  Choice "b" is correct. Change in the computation of warranty costs from 3% of sales to 1% of sales is a change in accounting estimate.

• Question 13:

  On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with

  Quo's president and outside accountants, made changes in accounting policies, corrected several errors

  dating from 1992 and before, and instituted new accounting policies.

  Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.

  This question represents one of Quo's transactions. List B represents the general accounting treatment

  required for these transactions. These treatments are:

  •

  Cumulative effect approach - Include the cumulative effect of the adjustment resulting from the accounting change or error correction in the 1993 financial statements, and do not restate the 1992 financial statements.

  •

  Retroactive or retrospective restatement approach - Restate the 1992 financial statements and adjust 1992 beginning retained earnings if the error or change affects a period prior to 1992.

  •

  Prospective approach - Report 1993 and future financial statements on the new basis but do not restate 1992 financial statements.

  Item to Be Answered The equipment that Quo manufactures is sold with a five-year warranty. Because of a production breakthrough, Quo reduced its computation of warranty costs from 3% of sales to 1% of sales.

  List B (Select one)

  A. Cumulative effect approach.

  B. Retroactive or retrospective restatement approach.

  C. Prospective approach.

  Correct Answer: C

  Choice "C" is correct. This affects only the prospective (current and subsequent) periods - not prior periods, not retained earnings.

• Question 14:

  On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with

  Quo's president and outside accountants, made changes in accounting policies, corrected several errors

  dating from 1992 and before, and instituted new accounting policies.

  Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.

  This question represents one of Quo's transactions. List A represents possible clarifications of these

  transactions as: a change in accounting principle, a change in accounting estimate, a correction of an error

  in previously presented financial statements, or neither an accounting change nor an accounting error.

  Item to Be Answered

  Quo changed from LIFO to FIFO to account for its finished goods inventory.

  List A (Select one)

  A. Change in accounting principal.

  B. Change in accounting estimate.

  C. Correction of an error in previously presented financial statements.

  D. Neither an accounting change nor an accounting error.

  Correct Answer: A

  Choice "a" is correct. Change from LIFO to FIFO is a change in accounting principle.

• Question 15:

  On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with

  Quo's president and outside accountants, made changes in accounting policies, corrected several errors

  dating from 1992 and before, and instituted new accounting policies.

  Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.

  This question represents one of Quo's transactions. List B represents the general accounting treatment

  required for these transactions. These treatments are:

  •

  Cumulative effect approach - Include the cumulative effect of the adjustment resulting from the accounting change or error correction in the 1993 financial statements, and do not restate the 1992 financial statements.

  •

  Retroactive or retrospective restatement approach - Restate the 1992 financial statements and adjust 1992 beginning retained earnings if the error or change affects a period prior to 1992.

  •

  Prospective approach - Report 1993 and future financial statements on the new basis but do not restate 1992 financial statements.

  Item to Be Answered

  Quo changed from LIFO to FIFO to account for its finished goods inventory.

  List B (Select one)

  A. Cumulative effect approach.

  B. Retroactive or retrospective restatement approach.

  C. Prospective approach.

  Correct Answer: B

  Choice "B" is correct. A change in accounting principle should be shown in the retained earnings statement of the earliest year presented as an adjustment of the beginning balance. All prior year financial statements are recast.

• Question 16:

  On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with Quo's president and outside accountants, made changes in accounting policies, corrected several errors dating from 1992 and before, and instituted new accounting policies. Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements. This question represents one of Quo's transactions. List A represents possible clarifications of these transactions as: a change in accounting principle, a change in accounting estimate, a correction of an error in previously presented financial statements, or neither an accounting change nor an accounting error.

  Item to Be Answered

  Quo changed from FIFO to average cost to account for its raw materials and work in process inventories.

  List A (Select one)

  A. Change in accounting principal.

  B. Change in accounting estimate.

  C. Correction of an error in previously presented financial statements.

  D. Neither an accounting change nor an accounting error.

  Correct Answer: A

  Choice "a" is correct. Change in inventory pricing method from FIFO to average cost is a change in accounting principle.

• Question 17:

  Deficits accumulated during the development stage of a company should be:

  A. Reported as organization costs.

  B. Reported as a part of stockholders' equity.

  C. Capitalized and written off in the first year of principal operations.

  D. Capitalized and amortized over a five year period beginning when principal operations commence.

  Correct Answer: B

  Choice "b" is correct. Deficits accumulated during the development stage of a company should be reported as a part of stockholders' equity. Rule: Development stage enterprises should present FS in accordance with GAAP and make additional disclosures such as: cumulative net losses, cumulative deficit (as part of equity), cumulative sales and expenses (part of I/S), cumulative statement of cash flows and supplementary "shareholders equity." Choices "a", "c", and "d" are incorrect, per the rule above.

• Question 18:

  Financial reporting by a development stage enterprise differs from financial reporting for an established operating enterprise in regard to footnote disclosures:

  A. Only.

  B. And expense recognition principles only.

  C. And revenue recognition principles only.

  D. And revenue and expense recognition principles.

  Correct Answer: A

  Choice "a" is correct. Financial reporting by a development stage enterprise differs from financial reporting

  for an established operating enterprise in regard to (more extensive) footnote disclosures only.

  Choices "b", "c", and "d" are incorrect. Revenue and expense recognition principles are the same.

  Rule: Development stage enterprises should present financial statements in accordance with GAAP and

  make additional disclosures such as: cumulative net losses, cumulative deficit (as part of equity),

  cumulative sales and expenses (as part of the income statement), cumulative statement of cash flows and

  supplementary "shareholders equity."

• Question 19:

  A statement of cash flows for a development stage enterprise:

  A. Is the same as that of an established operating enterprise and, in addition, shows cumulative amounts from the enterprise's inception.

  B. Shows only cumulative amounts from the enterprise's inception.

  C. Is the same as that of an established operating enterprise, but does not show cumulative amounts from the enterprise's inception.

  D. Is not presented.

  Correct Answer: A

  Rule: Development stage enterprises should present financial statements in accordance with GAAP and

  make additional disclosures such as cumulative amounts from inception for: net losses, deficits, sales,

  expenses, and cash flows and supplementary data.

  Choice "a" is correct, per the rule shown above.

  Choice "b" is incorrect. Current amounts are shown as well as cumulative amounts.

  Choice "c" is incorrect. Cumulative amounts from inception are shown.

  Choice "d" is incorrect. A statement of cash flows is required.

• Question 20:

  On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with Quo's president and outside accountants, made changes in accounting policies, corrected several errors dating from 1992 and before, and instituted new accounting policies. Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements. This question represents one of Quo's transactions. List A represents possible clarifications of these transactions as: a change in accounting principle, a change in accounting estimate, a correction of an error in previously presented financial statements, or neither an accounting change nor an accounting error.

  Item to Be Answered Quo manufactures heavy equipment to customer specifications on a contract basis. On the basis that it is preferable, accounting for these long-term contracts was switched from the completed-contract method to the percentage-of-completion method.

  List A (Select one)

  A. Change in accounting principal.

  B. Change in accounting estimate.

  C. Correction of an error in previously presented financial statements.

  D. Neither an accounting change nor an accounting error.

  Correct Answer: A

  Choice "a" is correct. Switching from the completed-contract method of accounting to the percentageofcompletion method is a "change in accounting principle."