CPA Financial Accounting and Reporting Far Quiz: Account For Changes In Accounting Principle
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Account For Changes In Accounting PrincipleQuestion 1 of 10

A U.S. GAAP for-profit retailer changed its inventory costing method from FIFO to weighted-average as of January 1, 20X5, and applied the change retrospectively under FASB ASC 250. The company presents comparative 20X5 and 20X4 income statements. For 20X4, cost of goods sold under FIFO was $4,000,000; under weighted-average it would have been $4,070,000. The tax rate is 30%. What is the impact of retrospective application on 20X4 income from continuing operations and 20X4 ending retained earnings presented in the 20X5 comparative financial statements?

Decrease 20X4 income from continuing operations by $70,000 and decrease 20X4 ending retained earnings by $70,000.
Decrease 20X4 income from continuing operations by $49,000 and decrease 20X4 ending retained earnings by $49,000.
Increase 20X4 income from continuing operations by $49,000 and increase 20X4 ending retained earnings by $49,000.
No change to 20X4 comparative amounts; disclose the change only because inventory costing changes are applied prospectively.
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CPA Financial Accounting and Reporting Far Quiz

CPA Financial Accounting and Reporting Far Quiz: Account For Changes In Accounting Principle

Practice Account For Changes In Accounting Principle in CPA Financial Accounting and Reporting Far with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

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Question 1

A U.S. GAAP for-profit retailer changed its inventory costing method from FIFO to weighted-average as of January 1, 20X5, and applied the change retrospectively under FASB ASC 250. The company presents comparative 20X5 and 20X4 income statements. For 20X4, cost of goods sold under FIFO was $4,000,000; under weighted-average it would have been $4,070,000. The tax rate is 30%. What is the impact of retrospective application on 20X4 income from continuing operations and 20X4 ending retained earnings presented in the 20X5 comparative financial statements?

  1. Decrease 20X4 income from continuing operations by $70,000 and decrease 20X4 ending retained earnings by $70,000.
  2. Decrease 20X4 income from continuing operations by $49,000 and decrease 20X4 ending retained earnings by $49,000. (correct answer)
  3. Increase 20X4 income from continuing operations by $49,000 and increase 20X4 ending retained earnings by $49,000.
  4. No change to 20X4 comparative amounts; disclose the change only because inventory costing changes are applied prospectively.
Explanation: Under FASB ASC 250, retrospective application of an accounting principle change requires restating prior period financial statements as if the new principle had always been applied. The change from FIFO to weighted-average increased 20X4 cost of goods sold by 70,000(70,000 (4,070,000 - $4,000,000), which decreases pretax income by $70,000. The after-tax effect is 49,000(49,000 (70,000 × 70% or $70,000 - $21,000 tax benefit), decreasing both income from continuing operations and ending retained earnings by $49,000. Answer A incorrectly uses the pretax amount without considering the tax benefit. Answer C incorrectly shows an increase when higher cost of goods sold decreases income. Answer D incorrectly suggests prospective application when retrospective application is required for voluntary principle changes. The key framework is that retrospective application affects both the income statement and balance sheet for all prior periods presented, with tax effects calculated at the applicable rate.

Question 2

A U.S. GAAP for-profit entity changes its accounting principle for long-term contracts from the completed-contract method to the percentage-of-completion method and applies the change retrospectively under FASB ASC 250. Management is preparing the note disclosure describing the change. Which disclosure is most appropriate regarding the reason for the change?

  1. State that the change was made because the new principle is preferable, describe why it is preferable, and describe the method of applying the change and its effects on the financial statements. (correct answer)
  2. State that the change was made to increase reported earnings and improve compliance with debt covenants; no further quantitative disclosure is required if comparative statements are presented.
  3. State that the change is a correction of an immaterial error and therefore does not require retrospective restatement or disclosure of line-item effects.
  4. State that the change is mandated by International Financial Reporting Standards (IFRS) and therefore U.S. GAAP retrospective application guidance does not apply.
Explanation: FASB ASC 250-10-50-1 requires disclosure of the nature of and reason for the accounting principle change, including an explanation of why the newly adopted principle is preferable. The entity must describe the method of applying the change (retrospective) and disclose the effects on financial statement line items and per-share amounts. Answer B inappropriately suggests disclosing earnings management motives when the standard requires stating the change is preferable based on improved financial reporting. Answer C incorrectly characterizes a principle change as an error correction. Answer D incorrectly references IFRS when dealing with U.S. GAAP requirements. The disclosure framework emphasizes transparency about why management believes the new principle provides more relevant and reliable information, supporting users' understanding of the change's business rationale beyond mere compliance.

Question 3

A U.S. GAAP not-for-profit organization changed its accounting principle for recognizing conditional grants and contributions, concluding that certain awards previously recognized as contribution revenue upon award should instead be recognized only when the barrier is overcome, consistent with FASB ASC 958. The organization will retrospectively apply the change to prior periods presented under FASB ASC 250. In the comparative financial statements, $500,000 of contribution revenue recognized in 20X4 under the prior principle would not have been recognized under the new principle; the organization has no income taxes. How does retrospective application affect the 20X4 statement of activities presented in the 20X5 comparative financial statements?

  1. Decrease 20X4 contribution revenue by $500,000 and decrease change in net assets by $500,000. (correct answer)
  2. Decrease 20X4 contribution revenue by $500,000 and increase change in net assets by $500,000 because the revenue becomes a liability.
  3. Record a cumulative-effect adjustment in 20X5 only; do not restate 20X4 because not-for-profit entities apply principle changes prospectively.
  4. Reclassify the $500,000 within net assets with donor restrictions with no effect on 20X4 change in net assets.
Explanation: FASB ASC 250 applies to not-for-profit organizations and requires retrospective application of accounting principle changes unless impracticable. Under the new principle for conditional grants per ASC 958, the $500,000 previously recognized as contribution revenue in 20X4 should not have been recognized because the barrier was not overcome. Retrospective application requires decreasing 20X4 contribution revenue by $500,000, which directly decreases the change in net assets by $500,000 (not-for-profits have no income taxes). Answer B incorrectly suggests the change in net assets would increase when removing revenue. Answer C incorrectly states not-for-profits apply changes prospectively when ASC 250 requires retrospective application. Answer D incorrectly suggests only a reclassification with no effect on total net assets. The framework for not-for-profit retrospective application mirrors for-profit entities except there are no income tax considerations, and the effect flows through change in net assets rather than net income.

Question 4

A U.S. GAAP for-profit entity changes its inventory costing method from FIFO to weighted-average in 20X5 and applies the change retrospectively under FASB ASC 250. The entity presents two years of comparative income statements and balance sheets and reports basic earnings per share (EPS). Which statement best describes how retrospective application affects EPS disclosures?

  1. Recompute and present prior-period basic EPS based on the restated income from continuing operations for each period presented, and disclose the effect of the change on EPS. (correct answer)
  2. Do not adjust prior-period EPS because EPS is not a financial statement line item; disclose only current-year EPS under the new method.
  3. Adjust only the current-year EPS and present prior-year EPS as previously reported to preserve comparability with prior filings.
  4. Recompute prior-period EPS only if the change affects cash flows; otherwise, EPS is unaffected by accounting principle changes.
Explanation: FASB ASC 250-10-50-1 explicitly requires disclosure of the effect of retrospectively applied accounting principle changes on any per-share amounts presented, including earnings per share. When prior periods are restated for the principle change, basic EPS must be recomputed using the restated income from continuing operations for each period presented, and the effect of the change on EPS must be disclosed. Answer B incorrectly states EPS is not adjusted when it is specifically required by ASC 250. Answer C incorrectly suggests maintaining previously reported EPS when consistency requires restatement. Answer D incorrectly limits EPS restatement to cash flow effects when all retrospective adjustments affecting net income require EPS recalculation. The framework for EPS disclosure under retrospective application ensures that per-share metrics remain consistent with the restated financial statements and provides users with comparable trend information.

Question 5

A U.S. GAAP for-profit company changes its inventory costing method from FIFO to weighted-average effective January 1, 20X5, and determines the change is material and preferable. The company presents comparative financial statements for 20X5 and 20X4 and applies the change retrospectively under FASB ASC 250. Which presentation is appropriate in the 20X5 financial statements?

  1. Restate 20X4 financial statement amounts to reflect weighted-average, adjust beginning retained earnings of the earliest period presented, and disclose the nature and effects of the change. (correct answer)
  2. Report the cumulative effect of the change as an extraordinary item in 20X5 and leave 20X4 amounts as previously reported.
  3. Present 20X4 amounts as previously reported but include pro forma supplemental schedules showing what 20X4 would have been under weighted-average.
  4. Apply the change prospectively beginning in 20X5 because inventory costing changes are treated as changes in accounting estimates.
Explanation: FASB ASC 250 requires retrospective application of voluntary accounting principle changes when the change is preferable and material. This means restating prior period financial statements as if the new principle had always been applied, adjusting beginning retained earnings of the earliest period presented for the cumulative effect, and providing comprehensive disclosure about the nature and effects of the change. Answer B incorrectly references extraordinary items, which were eliminated by ASU 2015-01. Answer C incorrectly suggests pro forma presentation when actual restatement is required. Answer D incorrectly treats a principle change as a change in estimate requiring prospective application. The retrospective application framework ensures comparability across periods by presenting all periods under the same accounting principle, with clear disclosure enabling users to understand the change and its effects.

Question 6

A U.S. GAAP for-profit company changed its accounting for long-term construction contracts from the completed-contract method to the percentage-of-completion method, concluding the change is preferable and applying it retrospectively under FASB ASC 250. For the year ended December 31, 20X4, revenue under completed-contract was $0 (no contracts completed), but under percentage-of-completion it would have been $2,000,000 with related costs of $1,600,000; the tax rate is 25%. How does retrospective application affect 20X4 income from continuing operations presented in the 20X5 comparative financial statements?

  1. Increase 20X4 income from continuing operations by $300,000. (correct answer)
  2. Increase 20X4 income from continuing operations by $400,000.
  3. Decrease 20X4 income from continuing operations by $300,000 because the new method accelerates revenue recognition.
  4. No change to 20X4 comparative amounts; changes in contract accounting are treated as changes in estimates and applied prospectively.
Explanation: FASB ASC 250 requires retrospective application when changing from the completed-contract method to percentage-of-completion method for long-term contracts. Under percentage-of-completion, the company would have recognized $2,000,000 in revenue and $1,600,000 in costs for 20X4, resulting in $400,000 of pretax income that was not recognized under completed-contract. The after-tax effect increases income from continuing operations by 300,000(300,000 (400,000 × 75% or $400,000 - $100,000 tax expense). Answer B incorrectly uses the pretax amount without considering taxes. Answer C incorrectly shows a decrease when recognizing previously unrecognized profit increases income. Answer D incorrectly treats this principle change as a change in estimate requiring prospective application. The framework for retrospective application of construction accounting changes requires recalculating revenue and costs under the new method for all contracts in progress during prior periods presented.

Question 7

A U.S. GAAP for-profit contractor changed from the completed-contract method to the percentage-of-completion method for long-term contracts on January 1, 20X5, and applied the change retrospectively under FASB ASC 250. At January 1, 20X4 (earliest period presented), the new method would have resulted in $900,000 of cumulative pretax gross profit that had not been recognized under the old method; the tax rate is 30%. What is the appropriate cumulative-effect adjustment to beginning retained earnings at January 1, 20X4 in the restated financial statements?

  1. Increase beginning retained earnings by $900,000 because retrospective application records the full pretax effect in equity.
  2. Increase beginning retained earnings by $630,000 and recognize a deferred tax liability of $270,000. (correct answer)
  3. Increase beginning retained earnings by $270,000 and recognize a deferred tax asset of $630,000.
  4. Decrease beginning retained earnings by $630,000 and recognize a deferred tax asset of $270,000.
Explanation: When retrospectively applying a change from completed-contract to percentage-of-completion method, FASB ASC 250 requires adjusting beginning retained earnings of the earliest period presented for the cumulative effect. The $900,000 of previously unrecognized pretax gross profit increases retained earnings by 630,000afterconsideringthetaxeffect(630,000 after considering the tax effect (900,000 × 70% or $900,000 - $270,000 tax). The $270,000 tax obligation creates a deferred tax liability because this income will be taxable when recognized for tax purposes. Answer A incorrectly ignores tax effects. Answer C incorrectly shows a deferred tax asset and wrong retained earnings amount. Answer D incorrectly decreases retained earnings when recognizing previously unrecognized profit increases it. The framework for cumulative adjustments requires calculating the pretax difference between methods, determining the after-tax effect for retained earnings, and recognizing the appropriate deferred tax asset or liability.

Question 8

A U.S. GAAP for-profit manufacturer changed its inventory costing method from FIFO to weighted-average beginning January 1, 20X5, and concluded the change is preferable under FASB ASC 250. The company will retrospectively apply the change to all prior periods presented in its comparative financial statements. For the year ended December 31, 20X4, ending inventory under FIFO was $1,200,000 and under weighted-average would have been $1,140,000; the income tax rate is 25%. How does retrospective application affect the December 31, 20X4 balance sheet amounts presented in the 20X5 comparative financial statements?

  1. Decrease inventory by $60,000, decrease retained earnings by $45,000, and decrease deferred tax liability by $15,000 as of December 31, 20X4. (correct answer)
  2. Decrease inventory by $60,000, decrease retained earnings by $60,000, and record no income tax effects because inventory methods are a change in estimate.
  3. Increase inventory by $60,000, increase retained earnings by $45,000, and increase deferred tax liability by $15,000 as of December 31, 20X4.
  4. Record the cumulative effect of $45,000 as a current-period adjustment to cost of goods sold in 20X5 with no restatement of 20X4 amounts.
Explanation: FASB ASC 250 requires retrospective application of voluntary accounting principle changes, meaning prior periods presented must be adjusted as if the new principle had always been used. The company changed from FIFO to weighted-average, resulting in inventory being 60,000lowerunderthenewmethod(60,000 lower under the new method (1,200,000 - $1,140,000), which increases cost of goods sold and decreases pretax income by $60,000. The after-tax effect is 45,000(45,000 (60,000 × 75%), decreasing retained earnings, while the tax benefit of 15,000(15,000 (60,000 × 25%) decreases the deferred tax liability. Answer B incorrectly treats this as a change in estimate with no tax effects. Answer C incorrectly increases inventory when the weighted-average method results in lower inventory values. Answer D incorrectly applies prospective treatment to a principle change that requires retrospective application. The framework for retrospective application requires adjusting all affected balance sheet accounts as of the beginning of the earliest period presented, with the net effect flowing through retained earnings.

Question 9

A U.S. GAAP for-profit entity changed its inventory costing method from FIFO to weighted-average on January 1, 20X5, and applied the change retrospectively. The entity determined that as of January 1, 20X4 (the earliest period presented), inventory under FIFO was $900,000 and under weighted-average would have been $860,000; the tax rate is 25%. Which journal entry (if any) is appropriate to record the cumulative effect adjustment at January 1, 20X4 for retrospective application?

  1. Dr Retained earnings $30,000; Dr Deferred tax asset $10,000; Cr Inventory $40,000. (correct answer)
  2. Dr Cost of goods sold $40,000; Cr Inventory $40,000 (recorded in 20X5 because the change is accounted for prospectively).
  3. Dr Inventory $40,000; Cr Retained earnings $30,000; Cr Deferred tax liability $10,000.
  4. No entry is permitted; retrospective application requires disclosure only and does not affect beginning balances.
Explanation: FASB ASC 250 requires recording a cumulative-effect adjustment to the beginning balance of retained earnings for the earliest period presented when retrospectively applying an accounting principle change. The change from FIFO to weighted-average decreased inventory by 40,000(40,000 (900,000 - $860,000), which represents higher cumulative cost of goods sold under the new method. The after-tax effect decreases retained earnings by 30,000(30,000 (40,000 × 75%), while the tax benefit of 10,000(10,000 (40,000 × 25%) creates a deferred tax asset (not liability) because the company has already paid taxes on income that is now being reduced. Answer B incorrectly applies prospective treatment. Answer C incorrectly increases inventory and creates a deferred tax liability. Answer D incorrectly states no entry is permitted when ASC 250 explicitly requires adjustment entries. The framework for cumulative-effect adjustments involves debiting retained earnings for the after-tax effect and adjusting the related balance sheet accounts to their corrected amounts.

Question 10

A U.S. GAAP not-for-profit organization changed its accounting principle for recognizing certain government grants, concluding under FASB ASC 958 that the grants are conditional and should not be recognized until the qualifying conditions are met. The change is applied retrospectively under FASB ASC 250 and affects both the statement of activities and statement of financial position. Which disclosure is required in the year of adoption in the notes to the financial statements?

  1. Disclose the nature of and justification for the change, the method of applying the change (retrospective), and the effect of the change on each financial statement line item and any per-unit measures for each period presented. (correct answer)
  2. Disclose only the nature of the change and that management believes it is preferable; quantitative effects are not required for not-for-profit entities.
  3. Disclose the change as a correction of an error, including a statement that previously issued financial statements should no longer be relied upon.
  4. Disclose the change only in management's discussion and analysis (MD&A); note disclosure is not required because the change is not material to cash flows.
Explanation: FASB ASC 250-10-50 requires comprehensive disclosure when an accounting principle change is applied retrospectively, regardless of whether the entity is for-profit or not-for-profit. Required disclosures include the nature of and justification for the change, the method of applying the change (retrospective), and the effect on each financial statement line item and any per-unit measures for each period presented. Answer B incorrectly limits disclosure requirements for not-for-profits when ASC 250 applies equally to all entities. Answer C incorrectly characterizes a voluntary principle change as an error correction. Answer D incorrectly suggests disclosure only in MD&A when note disclosure is explicitly required by ASC 250. The disclosure framework ensures financial statement users understand what changed, why it changed, how it was applied, and the quantitative effects on all periods presented, enabling proper analysis of trends and comparability.