ERROR CORRECTION

ERROR CORRECTION - THEORY

QUESTION 59-5 Multiple choice (IAA)

1. If ending inventory is understated, the effect is to
a. Overstate the net purchases Overstate the gross margin
c. Overstate the cost of goods available for sale
d. Overstate the cost of goods sold

2. If beginning inventory is overstated, the effect is to

a. Overstate net purchases
b. Overstate gross margin
C. Overstate cost of goods available for sale
d. Understate cost of goods sold

3. The overstatement of ending inventory in the current year will cause

a. Retained earnings to be understated in the current year-end statement of financial position
b. Cost of goods sold to be understated in the income statement of next year.
c. Cost of goods sold to be overstated in the income statement of the current year.
D. Statement of financial position not to be misstated in the next year-end.

4. At the middle of the year, an entity paid for insurance premium for the current year and
debited the amount to prepaid insurance. At year-end, the bookkeeper forgot to record the
amount that had expired. In the financial statements prepared at year-end, the omission
a. Overstates owners' equity
b. Understates assets
c. Understates net income
d. Overstates liabilities

5. If at end of current reporting period, an entity erroneously excluded some goods from ending
inventory and also these errors would cause erroneously did not record the purchase of these
goods,
a. The ending inventory to be overstated
b. The retained earnings to be understated
C. No effect on net income, working capital and retained earnings
d. Net income to be understated

6. When the current year's ending inventory is overstated

A. The current year's cost of goods sold is overstated.
B. The current year's total assets are understated.
C. The current year's net income is overstated.
D. The next year's net income is overstated.
7. An overstatement of ending inventory in the current period would result in income of the next
period being
a. Overstated
b.Understated
C. Correctly stated
d. The answer cannot be determined from the information

8. Which would result if the current year's ending inventory is understated in the cost of goods
sold calculation?
a. Cost of goods sold would be overstated
b. Total assets would be overstated
c. Net income would be overstated
d. Retained earnings would be overstated

9. If the beginning inventory in the current year was overstated, the income for the current year
would be
a. Understated and assets are correctly stated.
b. Understated and assets are overstated.
c. Overstated and assets are overstated.
d. Understated and assets are understated.

10, Which of the following would cause income to be overstated in the period of occurrence?
a. Overestimating bad debt expense
b. Understating beginning inventory
c. Overstated purchases
d. Understated ending inventory

QUESTION 59-6 Multiple choice (IAA)

1. Failure to record the expired amount of prepaid rent expense would not
a. Understate expense
b. Overstate net income
C. Overstate owners' equity
d. Understate liabilities

2. Failure to record accrued salaries at year-end results in .

a. Overstated retained earnings
b. Overstated assets
c. Overstated liabilities
d. Understated retained earnings

3. Failure to record depreciation at year-end results in

a. Understated income
b. Understated assets
c. Overstated expenses
d. Overstated assets

4. Which of the following is a counterbalancing error?

a. Understated depletion expense
b. Bond premium under-amortized
c. Prepaid expense adjusted incorrectly
d. Overstated depreciation expense

5. Which error will not self-correct next year?

a. Accrued expense not recognized at year-end
b. Accrued revenue not recognized at year-end
c. Depreciation expense overstated for the year
d. Prepaid expense not recognized at year-end

QUESTION 59-7 Multiple choice (AICPA Adapted)

1. At year-end, avas ship ordered merchandise for resale. The merchandise was shipped fo.b.
shipping point at year-end and the goods arrived early next year. The entity did not record the
purchase in the current year and did not include statements for the current year were
the goods in ending inventory. The effects on the financial
a. Income and owners' equity were correct, liabilities were incorrect, assets were correct.
b. Income and owners' equity were correct, assets and liabilities were incorrect.
C. Income, assets, liabilities and owners' equity were correct.
d. Income, assets, liabilities and owners' equity were
Incorrect.

2. Which of the following should not be reported retroactively?

a. Use of an unacceptable accounting principle and changing to an acceptable accounting
principle.
b. Correction of an overstatement of ending inventory made in prior year.
c. Use of an unrealistic accounting estimate and changing to a realistic estimate
d. Change from a good faith but erroneous estimate to a new estimate

3. At the end of the current year, special insurance costs, incurred but unpaid, were not
recorded. If these insurance costs were related to work in process, what is the effect of the
omission on accrued liabilities and retained eärnings, respectively in the current year-end
statement of financial position?
a. No effect and No effect
b. No effect and Overstated
c. Understated and No effect
d. Understated and Overstated

4. Which of the following emors creholder in an overstatement of both current assets and
shareholders' equity?
a. An understatement of accrued sales commissions
B. Noncurrent note receivable principal is misclassified as current asset
c. Annual depreciation on manufacturing machinery is understated
d. Holiday pay expense for administrative employees is misclassified as manufacturing
overhead

5. At the end of the current year, an entity failed to accrue sales commissions during the current
year but paid in the next year. The error was not repeated in the next year. What was the effect
of the error on current year-end working capital and retained earnings, respectively?
a. Overstated and Overstated
b. No effect and Overstated
c. No effect and No effect
d. Overstated and No effect

ACCOUNTING CHANGES

QUESTION 17-15 Multiple choice (ATCPA Adapted)

1. How should the effect of a change in accounting estimate be accounted for?

a. By restating amounts reported in prior periods
b. By reporting proforma amounts for prior periods
c. As a prior period adjustment of retained earnings
d. In the period of change and future periods if the change affects both

2. Which is characteristic of a change in accounting estimate?

a. It usually need not be disclosed
b. It does not effect the financial statements of prior period
c. It should be reported through the restatement of the financial statements
d. It makes necessary the reporting of proforma amounts

3. A change in the periods benefited by a deferred cost because additional information has been
obtained is
a. An accounting change reported in the period of change and future periods if the
change affects both
b. An accounting change that should be reported by restating the financial statements of all
prior periods presented
c. A correction of an error
d. Not an accounting change

4. A change in the residual value of an asset arising because additional information has been
obtained is
 a. An accounting change reported in the period of change and future periods if the
change affects both
b. An accounting change that should be reported by restating the financial statements of all
prior periods presented
c. A correction of an error
d. Not an accounting change

5. Why is retrospective treatment of change in accounting estimate prohibited?

a. A change in accounting estimate is a normal recurring correction or adjustment.
b. The retrospective treatment is not allowed.
c. Retrospective treatment of a change in accounting estimate is required by IFRS.
d. IFRS is silent on the issue.

6. The change in accounting policy inseparable from a change in accounting estimate should be
reported
a. As a correction of an error.
b. By restating the financial statements of all prior periods.
c. In the period of change and future periods if the change affects both.
d. As a disclosure after income from continuing operations.

7. Which should be reported when an entity changed from straight line depreciation to double
declining?
A. Cumulative effect of change in accounting policy
B. Proforma effect of retroactive application
C. Prior period error
D. An accounting change that should be reported currently and prospectively

8. Which is not a justification for a change in depreciation method?

a. A change in the estimated useful life
b. A change in the pattern of the estimated future benefit
c. To conform with the depreciation method prevalent in a particular industry
d. A change in the estimated future benefit

9. Which of the following should be reported when an entity changed the expected service life of
an asset?
A. Cumulative effect of change in accounting policy
B. Proforma effect of retroactive applicatio
C. Prior period error
D. An accounting change that should be reported in the period of change and future
periods

10. Which is the best explanation why accounting changes are classified into accounting policy
and accounting estimate?
a. The materiality of the change
 b. Each change involves different method of recognition in the financial statements
c. The fact that some treatments are considered GAAP
d. The need to provide a favorable profit picture

QUESTION 17-16
1. Which is the first step is police hierarchy of guidance when selecting accounting policies?
A. Apply a standard from IFRS if it specfically relates to the transaction
B. Apply the requirements in IFRS dealing with similar and related issue:
C. Consider the applicability ente definitions, recognition criteria and measurement
concepts in the Conceptual Framework.
D. Consider the most recent pronouncements of other standard setting bodies.

2. In the absence of an accounting standard that applies specifically to a transaction, what is the
most authoritative source in developing and applying an accounting policy?
a. The requirement and guidance in the standard or interpretation dealing with
similar and related issue.
b. The definition, recognition criteria and measurement of asset, liability, income and
expense in the Conceptual Framework.
c. Most recent pronouncement of other standard-setting body.
d. Accounting literature and accepted industry practice.

3. A change in accounting policy shall be made when

I. Required by law.
II. Required by an accounting standard or an interpretation
of the standard.
III. The change will result in more relevant or reliable information about the financial position,
financial performance and cash flows of the entity.
A. I and Ill only
B. II and III only
C. I and II only
D. I, II and III

4. Why is an entity permitted to change an accounting

The change would allow the entity to present a more
a. favorable profit picture.
b. The change would result in the financial statements providing more reliable and
relevant information about financial position, financial performance and cash
flows.
c. The change is made by the internal auditor.
d. The change is made by the CPA.

5. A change in accounting policy requires what kind of adjustment to the financial statements?
a. Current period adjustment
b. Prospective adjustment
 c. Retrospective adjustment
d. Current and prospective adjustment

6. A change in accounting policy requires that the cumulative effect of the change for prior
periods should be reported as an adjustment to
a. Beginning retained earnings for the earliest period presented.
b. Net income for the period in which the change occurred.
c. Comprehensive income for the earliest period presented.
d. Shareholders' equity for the period in which the change occurred.

7. Which of the following is accounted for as a change in accounting policy?

a. A change in the estimated useful life of property, plant and equipment
b. A change from cash basis to accrual basis of accounting
c. A change from expensing immaterial expenditures to deferring and amortizing them
when material
d. A change in inventory valuation from FIFO to average method

8. A change in accounting policy includes all of the following, except

a. The initial adoption of an accounting policy to carry asset at revalued amount.
b. The change from cost model to revaluation model in measuring property, plant and
equipment.
c. A change to a new accounting policy as required by a new standard.
d. A change from one method of depreciation to a different method of depreciation.

9. Which of the following should be treated as change in accounting policy?

a. A change is made in the method of calculating the provision for doubtful accounts
b. A change from cost model to fair value model in measuring investment property
c. An entity engaging in construction contract for the first time needs on accounting policy
to deal with this
d. All of these qualify as change in accounting policy

10. When it is difficult to distinguish between a change in accounting estimate and a change in
accounting policy, the change is treated as
a. Change in accounting estimate with appropriate disclosure
b. Change in accounting policy
c. Correction of an error
d. Change in accounting estimate with no appropriate disclosure

QUESTION 17-17

1. An entity that changed an accounting policy voluntarily

a. Inform shareholders prior to taking the decision.
b. Account for the change retrospectively
c. Treau the effect of the change as a component of OCI
 d. Treat the change prospectively.

2. Which statement best describes prospective application?

a. Recognizing a change in accounting policy in the current and future periods affected by
the change.
b. Correcting the financial statements as if a prior period error had never occurred
c. Applying a new accounting policy to transactions occurring after the date the
policy is changed.
d. Applying a new accounting policy to transactions as if that policy had always been
applied.

3. Which describes applying a new accounting policy to transactions as if that policy had always
been applied?
A. Retrospective application
B. Retrospective restatement
C. Prospective application
D. Prospective restatement

4. This means correcting the recognition, measurement and disclosure of amounts of elements
of financial statements as if a prior period error had never occurred.
a. Retrospective application
b. Retrospective restatement
c. Prospective application
d. Prospective restatement

5. If it is impracticable to determine the cumulative effect of an accounting change to any of the

prior periods, the accounting change should be accounted for
a. As a prior period error
b. On a prospective basis.
c. As a cumulative effect change in the income statement.
d. As an adjustment of retained earnings.

QUESTION 17- 19 Multiple Choice

1. Prior period errors

a. Do not include the chect ot a mistake in the application of accounting policy.
b. Do not affect the presentation of prior period comparative financial statements.
c. Do not require further disclosure.
d. Are reflected as adjustment of the opening balance of retained earnings of the
earliest period presented.

2. An example of a correction of an error in previously issued financial statements is a change

a. From FIFO method of inventory valuation to the average method.
b. In the service life of property, plant and equipment.
 c. From cash basis to accrual basis of accounting.
d. In the tax assessment related to a prior period.

3. An entity that changed from cash basis to accrual basis of accounting during the current year
should report
a. Prior period adjustment resulting from the correction of an error.
b. Prior period adjustment resulting from the change in accounting policy.
c. Component of income from continuing operations.
d. Component of income from discontinued operations.

4. A change from an accounting principle that is not generally accepted to one that is generally
accepted should be reported as
a. Component of income from continuing operations
b. Component of discontinued operations
c. An adjustment of retained earnings
d. Component of other comprehensive income

QUESTION 17-19
1. A change in reporting entity is actually a change in
a. Accounting policy
b. Accounting estimate
c. Accounting method
d. Accounting concept

2. Which is not a change in reporting entity?

a. Changing the entities in combined financial statements
b. Disposition of a subsidiary or other business unit
c. Presenting consolidated statements in place of the separate financial statements of
individual entities
d. Changing specific subsidiaries that constitute the group for which consolidated financial
statements are presented.

3. What is the proper accounting treatment for a change in reporting entity?

a. Restatement of financial statements of all prior periods presented
b. Restatement of current period financial statements
c. Note disclosure and supplementary schedule
d. Adjustment of retained earnings and note disclosure

4. An entity has included in the consolidated financial statements this year a subsidiary acquired
several years ago that was appropriately excluded from consolidation last year. How should this
change be reported?
a. An accounting change that should be reported prospectively
b. An accounting change that should be reported retrospectively
c. A correction of an error
 d. Neither an accounting change nor a correction of an error

QUESTION 17-20

1. During the current yea the finaty discovered that ending inventory reported in the financial
statements for the prior year was understated. How should the entity account for this
understatement?
a. Adjust the beginning inventory in the prior year.
b. Restate the financial statements with corrected balances for all periods presented.
c. Adjust the ending balance in retained earnings at current year-end
d. Make no entry because the error will self-correct

2. On March 15, 2023, the entity discovered that depreciation expense for 2022 was overstated.
The 2022 financial statements were authorized for issue on April 1, 2023. What must the entity
do?
a. Correct the 2022 financial statements before issuing them.
b. Reduce depreciation for 2023.
c. Restate the depreciation expense reported for 2022 in the comparative figures of the
2023 financial statements.
d. Do nothing.

3. On April 1, 2023, the entity discovered that depreciation expense for 2022 was overstated.
The 2022 financial statements were authorized for issue on March 15, 2023. What must the
entity do?
a. Reissue the 2022 financial statements with the correct depreciation expense.
b. Reduce depreciation for 2023.
c. Restate the depreciation expense reported for 2022 in the comparative figures of
the 2023 financial statements.
d. Do nothing.

HYPERINFLATION

1. Hyperinflation is indicated by all of the following, except

a. The general population prefers to keep its wealth in nonmonetary assets.
b. Interest rates, wages and prices are linked to a price index.
c. The cumulative inflation rate over three years is approaching or exceeds 100%:
d. All of these indicate hyperinflation.

2. All would indicate that hyperinflation exists, except

a. The general population regards monetary amounts in terms of relatively stable foreign
currency.
b. The cumulative inflation rate over three years is approaching or exceeds 100%.
c. Inflation rates have exceeded interest rates in three successive years.
d. The general population prefers to keep its wealth in nonmonetary assets.

3. Which would indicate that hyperinflation exists?

a. Sales on credit are at lower prices than cash sales.
b. Inflation is approaching or exceeds 20% per year.
c. Monetary items do not increase in value.
d. People prefer to keep their wealth in nonmonetary assets or a stable foreign currency.

4. An entity that wishes to present information about the eftect of changing prices in a
hyperinflationary economy should report this information in
a. The body of the financial statements
b. The notes to financial statements
c. Supplementary schedule
d. Management report to shareholders

5. In a hyperinflationary economy, monetary items

a. Are not restated because they are already expressed in terms of the measuring unit
current at year-end.
b. Are measured at fair value.
c. Are restated applying the general price index.
d. Are restated applying the specific price index.

6. Monetary items consist of

a. Assets and liabilities toms on amounts are fixed by contract or otherwise in terms of
pesos:
b. Assets and liabilities classified as current.
c. Cash and cash equivalents plus all receivables.
d. Cash, accounts receivable and current liabilities.

7. All of the following are monetary, except

a. Accounts payable
b. Accounts receivable
c. Administration cost paid in cash
d. Loan repayment at face value

8. The financial statements in a hyperinflationary economy shall be stated in terms of

a. Historical cost
b. Current cost
C. Fair value
d. Measuring unit current at the end of reporting period
9. The gain or loss on the net monetary position in a hyperinflationary economy shall be
included in
a. Profit or loss and separately disclosed
b. Retained earnings
C. Equity
d. Other comprehensive income

10. In a hyperinflationary economy, nonmonetary items are restated by applying

a. General price index
b. Specific price index
c. Both general price index and specific price index
d. Either general price index or specific price index

ANSWER KEY: DCDAAACDAA

QUESTION 62-11 Multiple choice (AICP Adapted)

1. During a period of inflation, an account balance remains constant. With respect to this
account, a purchasing power loss will be recognized if the account is a
a. Monetary asset
b.Monetary liability
c. Nonmonetary asset
d. Nonmonetary liability

2. During a period of inflation, an acçount balance remains constant. With respect to this
account, a purchasing power gain will be recognized if the account is a
a. Monetary liability
b. Monetary asset
c. Nonmonetary liability
d. Nonmonetary asset

3. During a period of deflation in which a liability account balance remains constant, which of the
following occurs?
a. A purchasing power loss if the item is a nonmonetary liability.
b. A purchasing power gain if the item is a nonmonetary liability.
C. A purchasing power loss if the item is a monetary liability.
d. A purchasing power gain if the item is a monetary liability.

4. During a period of inflation in which a liability account balance remains constant, which of the
following occurs?
a. A purchasing power loss if the item is a nonmonetary liability.
b. A purchasing power gain if the item is a nonmonetary liability.
c. A purchasing power loss if the item is a monetary liability.
d. A purchasing power gain if the item is a monetary liability.
5. During a period of deflation, an entity would have the greatest gain in general purchasing
power by holding
a. Cash
b. Property, plant, and equipment
c. Finance lease liability
d. Mortgage payable

6. Which of the following is classified as nonmonetary?

Allowance for doubtful accounts
b. Accumulated depreciation
c. Premium on bonds payable
d. Advances to unconsolidated subsidiaries

7. Which of the following is classified as nonmonetary?

a. Warranty liability
b. Accrued expense
C. Unamortized discount on bonds payable
d. Refundable deposit

8. Which of the following is classified as nonmonetary?

a. Cash surrender value
b. Long-term receivable
c. Accrued liability on firm purchase commitment
d. Inventory

9. Which of the following is classified as monetary?

a. Goodwill
b. Equipment
c. Patent
d. Allowance for doubtful accounts

10. Purchasing power gain or loss results from

a. Monetary asset only
b. Monetary liability only
c. Both monetary asset and monetary liability
d. Nonmonetary asset and nonmonetary liability

ANSWER KEY: A A C D A B A D D C

QUESTION 61-12 (AICPA Adapted)

1. Financial statements that are expressed under a stable monetary unit are
a.Constant peso financial statements
b. Nominal peso financial statements
c. Current cost financial statements
d. Fair value financial statements

2. A general price level statement of financial position is prepared and presented in terms of
a. The general purchasing power at the latest year-end.
b. The general purchasing power in the base period.
c. The average general purchasing power of the peso.
d. The general purchasing power at the date of issue.

3. Which method of reporting attempts to eliminate the effect of the changing value of the peso?
a. Discounted net present value of future cash flows
b. Historical cost restated for change in the price level
c. Replacement cost
d. Exit value

4. The restatement of historical peso financial statements to reflect the general price level
change results in presenting assets at
a. Lower of cost or net realizable value
b. Fair value
c. Cost adjusted for purchasing power change
d. Current replacement cost

5. Which argument in favor of price level adjusted financial statements is not valid?
a. Price level statements use historical cost.
b. Price level statements compare uniform purchasing power among various periods.
c. Price level statements measure current value.
d. Price level statements measure earnings in terms of a common peso.

ANSWER KEY: B A B C C

QUESTION 61-13 Multiple choice (AICPA Adapted)

1. In current cost financial statements
a. General price level gains or losses are recognized.
b. Amounts are stated in common purchasing power.
c. All items are different from historical cost.
d. Holding gains are recognized.

2. When an entity adjusted the historical cost income statement by applying specific price index
to depreciation, the income statement is prepared according to
a. Fair value accounting
b. Purchasing power accounting
c. Current cost accounting
d. Nominal peso accounting
3. When an entity prepares financial statements on a current cost basis, how is the cost of
goods sold computed?
a. Number of units sold times average current cost
b. Number of units sold times current cost at year-end
C. Number of units sold times beginning current cost
d. Beginning inventory at current cost plus cost of goods purchased less ending inventory at
current cost

4. Compared to historical cost income, which condition increases the current cost income during
inflation?
a. Current cost is the same as historical cost.
b. Current cost of land is less than historical cost.
c. Current cost of goods sold is less than historical cost.
d. Ending net monetary assets are less than beginning.

5. Could current cost financial statements report holding gains during the period for which of the
following?
a. Goods sold
b. Inventory
c. Goods sold and inventory
d. Neither goods sold nor inventory

ANSWER KEY: D C A C C