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AICPA CPA-Financial Exam
CPA Financial Accounting and Reporting (Page 4 )

Updated On: 26-Jan-2026
Page 4 of 34
PDF with 163 Questions

Goddard has used the FIFO method of inventory valuation since it began operations in 1987. Goddard decided to change to the weighted-average method for determining inventory costs at the beginning of 1990. The following schedule shows year-end inventory balances under the FIFO and weighted-average methods:



What amount, before income taxes, should be reported in the 1990 retained earnings statement as the cumulative effect of the change in accounting principle?

  1. $5,000 decrease.
  2. $3,000 decrease.
  3. $2,000 increase.
  4. $0.

Answer(s): A

Explanation:

Choice "a" is correct. $5,000 decrease.
The cumulative effect of change in accounting principle is determined as of the beginning of the year of change if comparative financial statements are not presented. In this case, the year of change is 1990, so the cumulative effect is the difference in inventory as of the end of 1989. [Note that inventory is a balance sheet item, so the change is based on the balances at the end of the last year the prior method was used. Had this question shown annual income statement amounts of cost of goods sold, we would have had to look at all the past years in the aggregate.] This will allow us to arrive at the adjustment to obtain the amount of retained earnings that would have been reported at the beginning of the period of change if the new accounting principle had been used for all prior periods.



During 20X5, Dale Corp. made the following accounting changes:



What amount should be shown in the 20X5 retained earnings statement as an adjustment to the beginning balance?

  1. $0
  2. $30,000
  3. $98,000
  4. $128,000

Answer(s): C

Explanation:

Choice "c" is correct. $98,000.
The cumulative effect of a change in accounting principle is now shown on the retained earnings statement as an adjustment to the beginning balance of retained earnings, assuming that the cumulative effect can be calculated. A change from LIFO to FIFO for inventory valuation (costing) is a change in accounting principle.
An exception is made however, for a change in depreciation method, since a change in depreciation method is no longer considered to be a change in accounting principle. A change in depreciation method is now considered to be both a change in principle and a change in estimate. These changes should now be accounted for as a change in estimate and handled prospectively. The new depreciation method should be used as of the beginning of the year of change and should start with the current book value of the underlying asset. No retroactive or retrospective calculations should be made, and no adjustment should be made to retained earnings. Choices "a", "b", and "d" are incorrect, per the above .



Earnings per share data should be reported on the income statement for:

  1. Option A
  2. Option B
  3. Option C
  4. Option D

Answer(s): B

Explanation:

Choice "b" is correct. Yes - Yes.
Both the "extraordinary items" and "income before extraordinary items" should be shown with an earnings per share number on the income statement.



The effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate should be reported:

  1. By restating the financial statements of all prior periods presented.
  2. As a correction of an error.
  3. As a component of income from continuing operations, in the period of change and future periods if the change affects both.
  4. As a separate disclosure after income from continuing operations, in the period of change and future periods if the change affects both.

Answer(s): C

Explanation:

Choice "c" is correct. A change in accounting principle that is inseparable from a change in accounting estimate should now be reported as a change in estimate and thus as a component of income from continuing operations, in the period of change and future periods if the change affects both.
Distinguishing between a change in accounting principle and a change in accounting estimate is sometimes difficult. For example, a company may change from deferring and amortizing a cost to recording it as an expense when incurred because future benefits of the cost have become doubtful. The new accounting method is adopted, therefore, in partial or complete recognition of the change in estimated future benefits. The effect of the change in principle is inseparable from the effect of the change in estimate. Changes of this type are often related to the continuing process of obtaining additional information and revising estimates and are therefore considered as changes in estimates. Choice "a" is incorrect. Restating the financial statements of all prior periods would be done in the case of prior period adjustments (corrections of errors), changes in accounting principle (retrospective application), and changes in accounting entity (retrospective application).

Choice "b" is incorrect. Correction of an error would be treated as a prior period adjustment. Choice "d" is incorrect. Separate disclosure after income from continuing operations would be done in the case of extraordinary items or discontinued operations. However, this disclosure would not be made "in the period of change and future periods if the change affects both" but only in the period of the extraordinary item or discontinued operation.



In single period statements, which of the following should not be reflected as an adjustment to the opening balance of retained earnings?

  1. Effect of a failure to provide for uncollectible accounts in the previous period.
  2. Effect of a decrease in the estimated useful life of depreciable equipment.
  3. Cumulative effect of a change from the percentage of completion to the completed contract method of accounting for long-term construction projects.
  4. Cumulative effect of a change from LIFO to FIFO in valuing merchandise inventory.

Answer(s): B

Explanation:

Choice "b" is correct. A change in the estimated useful life of a depreciable asset is a change in estimate handled prospectively. No adjustment to retained earnings is necessary. Choice "a" is incorrect. The correction of a failure to provide for uncollectible accounts is considered to be a correction of an error. The opening balance of retained earnings would be adjusted to correct the error.
Choice "c" is incorrect. This change is a change in accounting principle and is handled retrospectively. With retrospective application, the opening balance of retained earnings would be adjusted to reflect the cumulative effect of the changes.
Choice "d" is incorrect. This change is a change in accounting principle and is handled retrospectively. With retrospective application, the opening balance of retained earnings would be adjusted to reflect the cumulative effect of the changes.



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