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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 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
During 1993, Quo determined that an insurance premium paid and entirely expensed in 1992 was for the period January 1, 1992, through January 1, 1994.
List B (Select one)
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.
A material loss should be presented separately as a component of income from continuing operations when it is:
Choice 'd' is correct. Gains or losses that are unusual in nature or occur infrequently but not both, are presented as a component of income from continuing operations.
Choice 'a' is incorrect. Extraordinary items are shown net of tax in a separate section of the income statement after income from continuing operations.
Choice 'b' is incorrect. Cumulative effects of changes in accounting principle are now shown net of tax as an adjustment to the opening balance of retained earnings in the retained earnings statement. This treatment is called retrospective application. There really are no longer any cumulative effect types of changes in accounting principle. The cumulative effect is merely how the amount of the change is measured.
Choice 'c' is incorrect. This is the definition of an extraordinary item.
In financial reporting of segment data, which of the following items is always used in determining a segment's operating income?
Choice 'b' is correct. Sales to other segments would be used in determining a segment's operating income.
Rule: Equity in net income of another company, general corporate expenses, interest, income tax expense, and gains or losses on discontinued operations are all not included in segment profit unless they are included in the determination of segment profit reported to the 'Chief Operating Decision Maker.'
Which of the following types of entities are required to report on business segments?
Choice 'b' is correct. Only publicly-traded enterprises are required to report on business segments.
Choices 'a', 'c', and 'd' are incorrect, per the Explanation: above.
Which of the following is true regarding the comparison of managerial to financial accounting?
Choice 'd' is correct. Public companies must follow GAAP for (external) financial reporting purposes. GAAP need not be followed for (internal) managerial accounting purposes.
Choice 'a' is incorrect. Financial accounting is generally more precise.
Choice 'b' is incorrect. Managerial accounting has a future focus, while financial accounting focuses on reporting past results.
Choice 'c' is incorrect. The emphasis of financial accounting is providing useful information to financial statement users (including the characteristic of relevance), while the emphasis of managerial accounting is providing timely information to management decision makers.
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