ExpertHard1 markMultiple Choice
CPA · Question 33 · Area 3: Select Transactions
In Year 3, a company changes its inventory method from Weighted Average to FIFO. This is considered a Change in Accounting Principle. How should this be reported?
In Year 3, a company changes its inventory method from Weighted Average to FIFO. This is considered a Change in Accounting Principle. How should this be reported?
Answer options:
A.
Prospectively.
B.
Retrospectively, by adjusting the beginning Retained Earnings of the earliest period presented.
C.
As a correction of an error.
D.
By restating the Year 3 opening balance only, without adjusting prior statements.
How to approach this question
Change in Principle -> Retrospective. Change in Estimate -> Prospective. Change in Entity -> Retrospective. Error -> Restatement (Retrospective).
Full Answer
B.Retrospectively, by adjusting the beginning Retained Earnings of the earliest period presented.✓ Correct
B
A voluntary change in accounting principle is applied retrospectively. The cumulative effect of the change on periods prior to those presented is reflected in the carrying amounts of assets and liabilities and the beginning balance of retained earnings of the earliest period presented.
Common mistakes
Thinking LIFO to FIFO is prospective (it's FIFO to LIFO that is generally prospective because reconstructing LIFO layers is impossible).
Practice the full CPA FAR Practice Exam
50 questions · hints · full answers · grading
More questions from this exam
Q1According to the FASB Conceptual Framework, which of the following statements correctly describes...HardQ2On October 1, Year 1, Host Co. committed to a plan to dispose of a major component of its busines...HardQ3A company has a debt covenant requiring a current ratio of at least 2.0. On December 31, Year 1, ...HardQ4Orion Corp. reports under US GAAP. In preparing its statement of cash flows for the year ended De...HardQ5Parent Co. owns 80% of Sub Co. During Year 1, Parent sold inventory to Sub for $500,000. The cost...Hard