Discuss AICPA CPA-Financial Exam Topic 2 Question 107

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 manufactures heavy equipment to customer specifications on a contract basis. On the basis that it is preferable, accounting for these long-term contracts was switched from the completed-contract method to the percentage-of-completion method.

List B (Select one)

ACumulative effect approach.

BRetroactive or retrospective restatement approach.

CProspective approach.

Suggested Answer: B

Choice 'B' is correct. Changes in accounting principle are handled 'retrospectively.' Beginning retained earnings of the earliest year presented is adjusted for the cumulative effect of the change and all prior year financial statements are restated.

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31 comments · newest first

Gwen 10 months ago

I’m with you, Jestine! Cumulative effect makes the most sense here.

Melina 11 months ago

Definitely the prospective approach for long-term contracts.

Alecia 11 months ago

Wait, they can just change methods like that? Seems sketchy!

Laquanda 11 months ago

I disagree, I think they should go with the retrospective restatement.

Jestine 11 months ago

Sounds like a classic case for the cumulative effect approach.

Margarett 12 months ago

I believe it’s the prospective approach because they’re not adjusting past statements, just applying the new method from 1993 onward.

Eileen 12 months ago

I’m a bit confused. If they’re switching methods, does that mean they have to restate the previous year? I thought that was more for errors.

Hyman 12 months ago

I remember a practice question where we had to decide between cumulative effect and retrospective restatement. This feels similar, but I lean towards prospective here.

German 1 year ago

I think this might be a prospective approach since they’re changing the method going forward without restating 1992. But I’m not entirely sure.

Nohemi 1 year ago

This is a tricky one. The question mentions both accounting changes and error corrections, so I'll need to be really careful in my analysis to make sure I select the right treatment. I think I'll take a few minutes to re-read the details and consider each option before making my final choice.

Lonny 1 year ago

I'm feeling pretty confident about this one. The question clearly states that Quo's 1993 financial statements will be presented in comparative form with 1992, so the retroactive or retrospective restatement approach is the way to go to ensure consistency across the periods.

Graham 1 year ago

Okay, got it. Since Quo switched from the completed-contract method to the percentage-of-completion method for their long-term contracts, that would be considered a change in accounting policy. Based on the options given, the retroactive or retrospective restatement approach seems like the best fit here.

Kristel 1 year ago

Hmm, I'm a little unsure about this one. The question mentions both accounting changes and error corrections, so I'll need to carefully read through the details to determine the nature of the change before selecting the right approach.

Jeffrey 1 year ago

This seems like a straightforward accounting change question. I think the key is to identify the type of change and then select the appropriate accounting treatment from the list provided.

Jina 2 years ago

The retroactive approach sounds like a real blast from the past. It'll be like time-traveling back to 1992, but with more paperwork!

Alica 2 years ago

I hear Quo's president is so good at accounting, they should change their name to Quo-ta. Am I right, folks?

Virgina 2 years ago

Quo's president must be a real accountant whisperer to get all those changes done in one year. Personally, I'd just use the prospective approach and call it a day.

Jacquline 2 years ago

↳ replying to Virgina

C) Prospective approach.

Page 2 years ago

↳ replying to Virgina

C) Prospective approach.

Ailene 2 years ago

I'm not sure, but I think C) Prospective approach could also be a valid option. It's important to consider the impact on future financial statements as well.

Buddy 2 years ago

Accounting changes can be a real headache, but the percentage-of-completion method is generally more accurate. I'd go with the cumulative effect approach to keep things straightforward.

Clarence 2 years ago

↳ replying to Buddy

I agree, the percentage-of-completion method is definitely more accurate. Let's stick with the cumulative effect approach for simplicity.

Vanna 2 years ago

↳ replying to Buddy

Accounting changes can be tricky, but the cumulative effect approach sounds like the way to go.

Raelene 2 years ago

I agree with Macy. Restating the 1992 financial statements seems like the appropriate treatment for this transaction.

Berry 2 years ago

Switching the accounting method mid-year is always tricky. I'm not sure the retroactive approach is the way to go here. The prospective approach might be simpler to implement.

Ashleigh 2 years ago

The change from the completed-contract method to the percentage-of-completion method seems like the right move. The cumulative effect approach sounds like the best way to handle this.

Roosevelt 2 years ago

↳ replying to Ashleigh

Yes, the cumulative effect approach ensures transparency in reporting the adjustment.

An 2 years ago

↳ replying to Ashleigh

It's important to accurately reflect the impact of the accounting change in the 1993 financial statements.

Jose 2 years ago

↳ replying to Ashleigh

I think the cumulative effect approach is the way to go for this transaction.

Celia 2 years ago

↳ replying to Ashleigh

I agree, the change to the percentage-of-completion method makes sense.

Macy 2 years ago

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

AICPA CPA-Financial Exam - Topic 2 Question 107 Discussion