CHAPTER 21
ACCOUNTING CHANGES AND ERROR ANALYSIS
CHAPTER LEARNING OBJECTIVES
1. Discuss the types of accounting changes and the accounting for changes in accounting
principles.
2. Describe the accounting for changes in estimates and changes in the reporting entity.
3. Describe the accounting for correction of errors.
4. Analyze the effect of errors.
*5. Make the computations and prepare the entries necessary to record a change from or to
the equity method of accounting.
*6. Compare the procedures for accounting changes and error analysis under GAAP and
IFRS.
,21 - 2 Test Bank for Intermediate Accounting, Eighteenth Edition
TRUE-FALSE—Conceptual
1. A change in accounting principle is a change that occurs as the result of new information
or additional experience.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting, IFRS: None
2. Errors in financial statements result from mathematical mistakes or oversight or misuse of
facts that existed when preparing the financial statements.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting, IFRS: None
3. Adoption of a new principle in recognition of events that have occurred for the first time or
that were previously immaterial is treated as an accounting change.
Ans: F, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Communication, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation,
AICPA PC: Decision Making, IMA: Reporting, IFRS: None
4. Retrospective application refers to the application of a different accounting principle to
recast previously issued financial statements—as if the new principle had always been
used.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting, IFRS: None
5. When a company changes an accounting principle, it should report the change by
reporting the cumulative effect of the change in the current year’s income statement.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting,
IFRS: None
6. One of the disclosure requirements for a change in accounting principle is to show the
cumulative effect of the change on retained earnings as of the beginning of the earliest
period presented.
Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA:
Reporting, IFRS: None
7. An indirect effect of an accounting change is any change to current or future cash flows of
a company that result from making a change in accounting principle that is applied
retrospectively.
Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting, IFRS: None
8. Retrospective application is considered impracticable if a company cannot determine the
prior period effects using every reasonable effort to do so.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting, IFRS: None
9. Companies report changes in accounting estimates retrospectively.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting,
IFRS: None
10. When it is impossible to determine whether a change in principle or change in estimate
has occurred, the change is considered a change in estimate.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting, IFRS: None
, Accounting Changes and Error Analysis 21 - 3
True False Chapter 21 (Continued)
11. Companies account for a change in depreciation methods as a change in accounting
principle.
Ans: F, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting, IFRS: None
12. When companies make changes that result in different reporting entities, the change is
reported only prospectively.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting, IFRS: None
13. Changing the cost or equity method of accounting for investments is an example of a
change in reporting entity.
Ans: T, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting, IFRS: None
14. Accounting errors include changes in estimates that occur because a company acquires
more experience, or as it obtains additional information.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting, IFRS: None
15. Companies record corrections of errors from prior periods as an adjustment to the
beginning balance of retained earnings in the current period.
Ans: T, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
16. If a FASB standard creates a new principle, expresses preference for, or rejects a specific
accounting principle, the change is considered clearly acceptable.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, FSA, IFRS: None
17. Companies must make correcting entries for non-counterbalancing errors, even if they
have closed the prior year’s books.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
18. Counterbalancing errors are those errors that take longer than two periods to correct
themselves.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
19. For counterbalancing errors, restatement of comparative financial statements is necessary
even if a correcting entry is not required.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
*20. When changing from the equity method to the fair value method, a company must
eliminate the balance in Unrealized Holding Gain or Loss.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
, 21 - 4 Test Bank for Intermediate Accounting, Eighteenth Edition
MULTIPLE CHOICE—Conceptual
21. Accounting changes are often made, and the monetary impact is reflected in the financial
statements of a company even though, in theory, this may be a violation of the accounting
concept of
a. materiality.
b. consistency.
c. conservatism.
d. objectivity.
Ans: B, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
22. Which of the following is not accounted for as a change in accounting principle?
a. a change from LIFO to FIFO for inventory valuation
b. a change to a different method of depreciation for plant assets
c. a change from full cost to successful efforts in the extractive industry
d. a change from the completed-contract to the percentage-of-completion method
Ans: B, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
23. Which of the following is not a retrospective-type accounting change?
a. Completed-contract method to the percentage-of-completion method for long-term
construction contracts
b. LIFO method to the FIFO method for inventory valuation
c. Sum-of-the-years'-digits method to the straight-line method
d. Full-cost method to another method in the extractive industry
Ans: C, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA
PC: Decision Making, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
24. Which of the following is accounted for as a change in accounting principle?
a. a change in the estimated useful life of plant assets.
b. a change from the cash basis of accounting to the accrual basis of accounting.
c. a change from expensing immaterial expenditures to deferring and amortizing them as
they become material.
d. a change in inventory valuation from average cost to FIFO.
Ans: D, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA
PC: Decision Making, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
ACCOUNTING CHANGES AND ERROR ANALYSIS
CHAPTER LEARNING OBJECTIVES
1. Discuss the types of accounting changes and the accounting for changes in accounting
principles.
2. Describe the accounting for changes in estimates and changes in the reporting entity.
3. Describe the accounting for correction of errors.
4. Analyze the effect of errors.
*5. Make the computations and prepare the entries necessary to record a change from or to
the equity method of accounting.
*6. Compare the procedures for accounting changes and error analysis under GAAP and
IFRS.
,21 - 2 Test Bank for Intermediate Accounting, Eighteenth Edition
TRUE-FALSE—Conceptual
1. A change in accounting principle is a change that occurs as the result of new information
or additional experience.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting, IFRS: None
2. Errors in financial statements result from mathematical mistakes or oversight or misuse of
facts that existed when preparing the financial statements.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting, IFRS: None
3. Adoption of a new principle in recognition of events that have occurred for the first time or
that were previously immaterial is treated as an accounting change.
Ans: F, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Communication, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation,
AICPA PC: Decision Making, IMA: Reporting, IFRS: None
4. Retrospective application refers to the application of a different accounting principle to
recast previously issued financial statements—as if the new principle had always been
used.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting, IFRS: None
5. When a company changes an accounting principle, it should report the change by
reporting the cumulative effect of the change in the current year’s income statement.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting,
IFRS: None
6. One of the disclosure requirements for a change in accounting principle is to show the
cumulative effect of the change on retained earnings as of the beginning of the earliest
period presented.
Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA:
Reporting, IFRS: None
7. An indirect effect of an accounting change is any change to current or future cash flows of
a company that result from making a change in accounting principle that is applied
retrospectively.
Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting, IFRS: None
8. Retrospective application is considered impracticable if a company cannot determine the
prior period effects using every reasonable effort to do so.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting, IFRS: None
9. Companies report changes in accounting estimates retrospectively.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting,
IFRS: None
10. When it is impossible to determine whether a change in principle or change in estimate
has occurred, the change is considered a change in estimate.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting, IFRS: None
, Accounting Changes and Error Analysis 21 - 3
True False Chapter 21 (Continued)
11. Companies account for a change in depreciation methods as a change in accounting
principle.
Ans: F, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting, IFRS: None
12. When companies make changes that result in different reporting entities, the change is
reported only prospectively.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting, IFRS: None
13. Changing the cost or equity method of accounting for investments is an example of a
change in reporting entity.
Ans: T, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting, IFRS: None
14. Accounting errors include changes in estimates that occur because a company acquires
more experience, or as it obtains additional information.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting, IFRS: None
15. Companies record corrections of errors from prior periods as an adjustment to the
beginning balance of retained earnings in the current period.
Ans: T, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
16. If a FASB standard creates a new principle, expresses preference for, or rejects a specific
accounting principle, the change is considered clearly acceptable.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, FSA, IFRS: None
17. Companies must make correcting entries for non-counterbalancing errors, even if they
have closed the prior year’s books.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
18. Counterbalancing errors are those errors that take longer than two periods to correct
themselves.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
19. For counterbalancing errors, restatement of comparative financial statements is necessary
even if a correcting entry is not required.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
*20. When changing from the equity method to the fair value method, a company must
eliminate the balance in Unrealized Holding Gain or Loss.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
, 21 - 4 Test Bank for Intermediate Accounting, Eighteenth Edition
MULTIPLE CHOICE—Conceptual
21. Accounting changes are often made, and the monetary impact is reflected in the financial
statements of a company even though, in theory, this may be a violation of the accounting
concept of
a. materiality.
b. consistency.
c. conservatism.
d. objectivity.
Ans: B, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
22. Which of the following is not accounted for as a change in accounting principle?
a. a change from LIFO to FIFO for inventory valuation
b. a change to a different method of depreciation for plant assets
c. a change from full cost to successful efforts in the extractive industry
d. a change from the completed-contract to the percentage-of-completion method
Ans: B, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Decision Making, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
23. Which of the following is not a retrospective-type accounting change?
a. Completed-contract method to the percentage-of-completion method for long-term
construction contracts
b. LIFO method to the FIFO method for inventory valuation
c. Sum-of-the-years'-digits method to the straight-line method
d. Full-cost method to another method in the extractive industry
Ans: C, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA
PC: Decision Making, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
24. Which of the following is accounted for as a change in accounting principle?
a. a change in the estimated useful life of plant assets.
b. a change from the cash basis of accounting to the accrual basis of accounting.
c. a change from expensing immaterial expenditures to deferring and amortizing them as
they become material.
d. a change in inventory valuation from average cost to FIFO.
Ans: D, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA
PC: Decision Making, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
