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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 A represents possible clarifications of these transactions as: a change in accounting principle, a change in accounting estimate, a correction of an error in previously presented financial statements, or neither an accounting change nor an accounting error.
Item to Be Answered
Quo sells extended service contracts on its products. Because related services are performed over several years, in 1993 Quo changed from the cash method to the accrual method of recognizing income from these service contracts.
List A (Select one)
Suggested Answer: C
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Choice 'c' is correct. Change from the cash method to the accrual method is a correction of an error in previously presented financial statements.
38 comments · newest first
LE
Lennie
9 months ago
I feel like this is definitely a change in accounting principle, but I hope I’m not mixing it up with something else we practiced.
JU
Justine
9 months ago
I wonder if this could be seen as a correction of an error, but it seems more like a deliberate change in how they recognize income.
NO
Noel
9 months ago
I'm not entirely sure, but I remember something about changes in accounting estimates being related to future projections. This feels more like a principle change to me.
AR
Aron
9 months ago
I think this might be a change in accounting principle since they're switching from cash to accrual for recognizing income.
SY
Sylvie
10 months ago
I’m surprised they didn’t catch this sooner.
AM
Amie
10 months ago
Nope, it’s a principle change for sure!
BA
Barney
10 months ago
Wait, are we sure it’s not just an estimate change?
JA
Jamal
10 months ago
Totally agree, it's about how they recognize income now.
MI
Miesha
10 months ago
This is definitely a change in accounting principle.
WI
William
11 months ago
I think I've got it - the change from cash to accrual method for service contract revenue is a change in accounting principle. The key is that it's a voluntary change in the method used, not a correction of an error. Feeling confident about this one!
SA
Sabine
11 months ago
This is a good example of why it's important to really understand the distinctions between accounting changes and errors. I'm going to carefully review the details and definitions before answering.
AN
Angella
11 months ago
Okay, let me think this through step-by-step. Quo changed from the cash method to the accrual method for recognizing income from service contracts. That sounds like a change in accounting principle to me, but I'll double-check the definitions just to be sure.
MA
Malcom
11 months ago
Hmm, I'm a little unsure about this one. The wording is a bit tricky, and I want to make sure I understand the differences between the accounting change options before selecting an answer.
BU
Burma
12 months ago
This seems like a straightforward question about accounting changes. I'm pretty confident I can identify the correct treatment here.
KA
Kathryn
12 months ago
Okay, I've got this. Quo is changing their revenue recognition method for service contracts, moving from cash to accrual. That's definitely a change in accounting principle, not just an estimate or error correction. I feel confident about selecting that option.
TA
Tanja
12 months ago
Hmm, I'm not totally sure on this one. It seems like it could be a correction of an error if Quo was previously recognizing the service contract revenue incorrectly. But the fact that they're changing the method makes me think it's more of an accounting principle change. I'll have to review the differences between those options.
AN
Angelica
1 year ago
I'm a little unsure about this one. It could be a change in accounting estimate if Quo is just adjusting how they recognize revenue over time, but the wording about changing from cash to accrual makes me think it's more of a change in principle. I'll have to think it through carefully.
CL
Claudia
1 year ago
This seems like a straightforward change in accounting principle to me. Quo is moving from the cash method to the accrual method for recognizing income from service contracts, which is a change in how they account for these transactions.
CA
Carey
1 year ago
I agree with Jess, the change in method of recognizing income is a change in principle.
TE
Terrilyn
1 year ago
A) Change in accounting principle, no doubt. Though I have to wonder - who thought cash accounting for multi-year service contracts was a good idea in the first place? Maybe Quo should consider hiring some competent controllers going forward.
ME
Melvin
1 year ago
B) Change in accounting estimate.
CA
Carey
1 year ago
A) Change in accounting principle.
JE
Jess
2 years ago
But the change from cash to accrual method seems like a change in principle to me.
AL
Aleisha
2 years ago
Hmm, I'm not convinced. What if they just realized the cash method wasn't giving an accurate picture and decided to switch to accrual? That could be seen as a change in estimate, no? Either way, I bet the auditors will have a field day with this one.
MI
Misty
1 year ago
User 4: B) Change in accounting estimate.
CA
Carissa
1 year ago
User 3: A) Change in accounting principal.
CO
Coral
1 year ago
User 2: B) Change in accounting estimate.
SH
Shenika
1 year ago
User 1: A) Change in accounting principal.
MA
Madelyn
2 years ago
I disagree, I believe it is B) Change in accounting estimate.
WI
Willow
2 years ago
This seems like a straightforward case of a change in accounting principle to me. The company is altering its core accounting policies, not just correcting an error or making an estimate adjustment.
RE
Rebecka
2 years ago
I think the correct answer is A) Change in accounting principle. Switching from cash to accrual method for recognizing service contract revenue is a change in the fundamental way the company accounts for these transactions.
MA
Marquetta
1 year ago
Yes, it definitely represents a change in the fundamental way revenue is recognized.
CO
Cornell
1 year ago
Yes, it's important to accurately reflect the timing of when the revenue is earned.
LI
Lindsey
1 year ago
I agree, changing from cash to accrual method is a significant shift.
AD
Adelle
1 year ago
I think the correct answer is A) Change in accounting principle.
TA
Tamie
1 year ago
It makes sense, since it's a fundamental shift in how the revenue is recognized.
TR
Tresa
1 year ago
I agree, the change from cash to accrual method is definitely a change in accounting principle.
JE
Jess
2 years ago
I think the answer is A) Change in accounting principal.