Deal of The Day! Hurry Up, Grab the Special Discount - Save 25% - Ends In 00:00:00 Coupon code: SAVE25
Welcome to Pass4Success

- Free Preparation Discussions

AICPA Exam CPA-Financial Topic 2 Question 107 Discussion

Actual exam question for AICPA's CPA-Financial exam
Question #: 107
Topic #: 2
[All CPA-Financial Questions]

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 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 B (Select one)

Show Suggested Answer Hide Answer
Suggested Answer: B

Choice 'B' is correct. Changes in accounting principle are handled 'retrospectively.' Beginning retained earnings of the earliest year presented is adjusted for the cumulative effect of the change and all prior year financial statements are restated.


Contribute your Thoughts:

Raelene
8 days ago
I agree with Macy. Restating the 1992 financial statements seems like the appropriate treatment for this transaction.
upvoted 0 times
...
Berry
12 days ago
Switching the accounting method mid-year is always tricky. I'm not sure the retroactive approach is the way to go here. The prospective approach might be simpler to implement.
upvoted 0 times
...
Ashleigh
15 days ago
The change from the completed-contract method to the percentage-of-completion method seems like the right move. The cumulative effect approach sounds like the best way to handle this.
upvoted 0 times
...
Macy
20 days ago
I think the answer is B) Retroactive or retrospective restatement approach.
upvoted 0 times
...

Save Cancel