AICPA CPA-Financial Exam - Topic 2 Question 105 Discussion

Actual exam question for AICPA's CPA-Financial exam

Question #: 105
Topic #: 2

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 B represents the general accounting treatment required for these transactions. These treatments are:

* Cumulative effect approach - Include the cumulative effect of the adjustment resulting from the accounting change or error correction in the 1993 financial statements, and do not restate the 1992 financial statements.

* Retroactive or retrospective restatement approach - Restate the 1992 financial statements and adjust 1992 beginning retained earnings if the error or change affects a period prior to 1992.

* Prospective approach - Report 1993 and future financial statements on the new basis but do not restate 1992 financial statements.

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 B (Select one)

ACumulative effect approach.

BRetroactive or retrospective restatement approach.

CProspective approach.

Show Suggested Answer

Suggested Answer: B

Choice 'B' is correct. If comparative FS are issued, restate prior year's FS. If comparative FS are not issued, restate prior year-end's retained earnings account by 'adjusting' (net of tax) the opening balance of the current retained earnings statement. Note that when an error is corrected, retroactive restatement is used, and when there is a change in accounting principle, retrospective restatement is done. However, this is only a difference in terminology.

by Myrtie at Jan 11, 2025, 09:30 AM

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Precious

3 months ago

So, does this mean 1992 statements stay untouched?

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Francesco

3 months ago

Totally agree, they should stick with the cumulative effect!

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Wynell

3 months ago

Wait, can they just change methods like that?

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Gilma

4 months ago

Definitely the cumulative effect approach here!

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Melvin

4 months ago

Quo switched to accrual method in 1993.

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Lashon

4 months ago

I’m confused because I thought we had to restate previous years for any significant changes, but maybe that only applies to errors?

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Nathan

4 months ago

This seems similar to a practice question we did on revenue recognition changes. I feel like the prospective approach fits best here.

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Susana

4 months ago

I’m not entirely sure, but I remember something about cumulative effects being used for changes that don’t require restating prior periods.

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Dierdre

5 months ago

I think this might be a prospective approach since Quo is changing how they recognize income going forward without restating prior years.

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Layla

5 months ago

The prospective approach doesn't seem right since the question states the change is being made in 1993. I think either the cumulative effect or retrospective restatement approach is the way to go, but I'll double-check the details to be sure.

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Maia

5 months ago

I'm leaning towards the retroactive or retrospective restatement approach. Since the change affects revenue recognition, it seems like Quo should restate the 1992 financial statements to ensure comparability.

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Angelica

5 months ago

The key here is that Quo changed from the cash method to the accrual method for recognizing income from service contracts. Based on the information provided, I believe the cumulative effect approach is the correct answer.

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Marg

5 months ago

Hmm, I'm a bit confused on the different approaches here. I'll need to re-read the details carefully to make sure I understand which one applies in this situation.

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Viola

5 months ago

This seems like a straightforward accounting change question. I think the cumulative effect approach makes the most sense since the change is being made in 1993 and doesn't affect prior years.

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Willodean

1 year ago

I'm not sure, but I think the answer might be A) Cumulative effect approach. They should include the adjustment in the 1993 financial statements.

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Ellsworth

1 year ago

Haha, Quo must have had quite the messy books before Reed came in and cleaned things up. I bet the outside accountants were sweating bullets trying to figure out all those errors!

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Harris

1 year ago

B) Retroactive or retrospective restatement approach.

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Fatima

1 year ago

A) Cumulative effect approach.

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Alline

1 year ago

I agree with Delsie. Quo changed their accounting method, so they should restate the 1992 financial statements.

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Artie

1 year ago

Hmm, the wording about 'correcting several errors dating from 1992 and before' makes me wonder if the retroactive approach might apply. But I think the cumulative effect is the safest bet.

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Margurite

1 year ago

I think the retroactive restatement approach might be necessary considering the errors dating back to 1992.

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Ashanti

1 year ago

I agree, the cumulative effect approach seems like the safest option.

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Marisha

1 year ago

I agree, the cumulative effect approach is the way to go. Quo shouldn't have to restate their 1992 financials just because they changed their policy in 1993.

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Twana

1 year ago

User 3: Definitely, Quo can move forward with the new policy without having to redo past financial statements.

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Cathrine

1 year ago

User 2: I agree, it makes sense to include the adjustment in the 1993 financial statements without restating 1992.

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Queen

1 year ago

User 1: I think the cumulative effect approach is the best option here.

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Delsie

1 year ago

I think the answer is B) Retroactive or retrospective restatement approach.

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Walton

1 year ago

The cumulative effect approach makes the most sense here since Quo changed their accounting policy for service contracts, not correcting an error from a previous year.

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