AICPA CPA-Financial Exam - Topic 1 Question 26 Discussion

Actual exam question for AICPA's CPA-Financial exam

Question #: 26
Topic #: 1

In 1990, Brighton Co. changed from the individual item approach to the aggregate approach in applying the lower of FIFO cost or market to inventories. The cumulative effect of this change should be reported in Brighton's financial statements as a:

ARetrospective adjustment on the retained earnings statement, with separate disclosure.

BComponent of income from continuing operations, with separate disclosure.

CComponent of income from continuing operations, without separate disclosure.

DComponent of income after continuing operations, with separate disclosure.

Show Suggested Answer

Suggested Answer: A

Choice 'a' is correct. A change in the composition of the elements of cost such as changing from the individual item approach to the aggregate approach in applying the lower of FIFO cost or market to inventories (LCM is covered in F4) is an example of a change in accounting principle. The cumulative effect of the change in accounting principle should now be shown on the retained earnings statement as an adjustment to the beginning balance of retained earnings, in what is called retrospective application.

Choices 'b', 'c', and 'd' are incorrect. The cumulative effect of a change in accounting principle is now reported on the retained earnings statement, not the income statement. Most of these types of changes (changes in accounting principle) used to be reported on the income statement. SFAS No. 154 changed that.

by Mari at May 07, 2022, 02:56 PM

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