1|Page

b. The retrospective treatment is not allowed.

CONCEPTUAL FRAMEWORK AND c. Retrospective treatment of a change in
ACCOUNTING STANDARDS (CFAS) accounting estimate is required by IFRS.
d. IFRS is silent on the issue.
PRACTICE SET NO. 5
PAS 8 – ACCOUNTING POLICIES,
6. Which should be reported when an entity
CHANGES IN ACCOUNTING ESTIMATES changed from straight line depreciation to double
AND ERRORS declining?
PAS 10 - EVENTS AFTER THE a. Cumulative effect of change in accounting
REPORTING PERIOD policy
KBGARCIA, CPA b. Proforma effect of retroactive application
c. Prior period error
1. Which of the following are included in the d. An accounting change that should be reported
categories of accounting change? currently and prospectively
I. Change in accounting estimate
II. Change in accounting policy 7. A change in accounting policy includes all of
III. Correction of prior period error the following, except
a. I only a. the initial adoption of an accounting policy to
b. I and II only carry asset at revalued amount.
c. III only b. the change from cost model to revaluation
d. I, II and III model in measuring property, plant and
equipment.
2. Which of the following is the best explanation c. a change in the measurement basis.
why accounting changes are classified into d. a change from one method of depreciation to a
change in accounting policy and change in different method of depreciation.
accounting estimate? e. all of these are changes in accounting policy.
a. the materiality of the change.
b. each change involves different method of 8. In the absence of an accounting standard that
recognition in the financial statements. applies specifically to a transaction, what is the
c. the fact that some treatments are considered most authoritative source in developing and
generally accepted. applying an accounting policy?
d. all of these correctly explains why accounting a The requirement and guidance in the standard
changes are classified into change in accounting or interpretation dealing with similar and related
policy and change in accounting estimate. issue.
b. The definition, recognition criteria and
3. How should the effect of a change in measurement of asset, liability, income and
accounting estimate be accounted for? expense in the Conceptual Framework.
a. By restating amounts reported in prior periods c. Most recent pronouncement of other standard-
b. By reporting proforma amounts for prior periods setting body.
c. As a prior period adjustment of retained d. Accounting literature and accepted industry
earnings practice.
d. In the period of change and future periods if the
change affects both 9. A change in accounting policy shall be made
when
4. A change in accounting policy shall be made I. Required by law.
when II. Required by an accounting standard or an
I. Required by law. interpretation
II. Required by an accounting standard or of the standard
an interpretation of the standard. IlI. The change will result in more relevant or
III. The change will result in more relevant reliable information about the financial position,
and faithfully represented information about the financial performance and cash flows of the entity.
financial position, financial performance and cash a. I and III only
flows of the entity. b. II and III only
a. I and II c. I and II only
b. I and III d. I, II and III
c. II and III
d. I, II and III 10. If it is impracticable to determine the
cumulative effect of an accounting change to any
5. Why is retrospective treatment of change in of the prior periods, the accounting change should
accounting estimate prohibited? be accounted for
a. A change in accounting estimate is a normal
a. as a prior period adjustment
recurring correction or adjustment.
2|Page

b. on a prospective basis b. do not affect the presentation of prior period

c. as a cumulative effect change on the income comparative financial statements.
statement. c. do not require further disclosure.
d. as an adjustment to retained earnings. d. are reflected as adjustment of the opening
balance of retained earnings of the earliest period
11. Which describes applying a new accounting presented.
policy to transactions as if that policy had always
been applied? 3. Prior period errors include the effects of
a. Retrospective application a. mathematical mistakes, mistakes in applying
b. Retrospective restatement accounting policies, oversights or
c. Prospective application misinterpretation of facts, and fraud.
d. Prospective restatement b. facts, fraud, not balance income statements
and balance sheet.
12. This means correcting the recognition, c. depreciation
measurement and disclosure of amounts of d. none of the above.
elements of financial statements as if a prior
period error had never occurred. 4. Which statement is true about nonadjusting
a. Retrospective application events?
b. Retrospective restatement a. The entity shall disclose the nature and effect of
c. Prospective application the event in the financial statements.
d. Prospective restatement b. The entity shall adjust the related amount in the
financial statements.
13. An entity that changed from cash basis to c. The entity shall disclose the nature and effect of
accrual basis of accounting during the current the event and adjust the related amount.
year should report d. The entity shall disclose nothing.
a. Prior period adjustment resulting from the
correction of an error. 5. Events that occur after the current year-end but
b. Prior period adjustment resulting from the before the financial statements are issued and
change in accounting policy. affect the realizability of accounts receivable
c. Component of income from continuing should be
operations. a. Discussed in the management annual report.
d. Component of income from discontinued b. Disclosed in the notes to financial statements.
operations. c. Used to record an adjustment to bad debt
expense.
14. A change from an accounting principle that is d. An adjustment directly to retained earnings.
not generally accepted to one that is generally
accepted should be reported as 6. Nonadjusting events include all, except
a. Component of income from continuing a. A major business combination after reporting
operations period
b. Component of discontinued operations b. Announcing a plan to discontinue operation
c. An adjustment of retained earnings c. Expropriationof major asset after reporting
d. Component of the comprehensive income period
d. Destruction of a major production plant by a fire
before the end of the reporting period
ERROR CORRECTION
7. If ending inventory is understated, the effect is
1. Prior period errors are omissions and
to
misstatements in the entity’s financial statements
a. Overstate the net purchases
for one or more periods that result from a failure to
b. Overstate the gross margin
use or misuse of reliable information, and they
c. Overstate the cost of goods available for sale
include:
d. Overstate the cost of goods sold
a. was available when financial statements for
these periods were authorized for issue.
8. If beginning inventory is overstated, the effect is
b. could reasonably be expected to have been
to
obtained and taken into account in the preparation
a. Overstate net purchases
of those financial statements.
b. Overstate gross margin
c. both a and b
c. Overstate cost of goods available for sale
d. all of the above.
d. Understate cost of goods sold
2. Prior period errors
9. The overstatement of ending inventory in the
a. do not include the effect of a mistake in the
current year will cause
application of accounting policy.
a. Retained earnings to be understated in the
3|Page

current year-end statement of financial position straight-line method (SLM). The entity’s 2022 and
b. Cost of goods sold to be understated in the 2021 comparative financial statements will reflect
income statement of next year. which method(s)?
c. Cost of goods sold to be overstated in the 2021 2022
income statement of the current year. a. SLM SLM
d. Statement of financial position not to be b. SLM SYD
misstated in the next year-end. c. SYD SYD
d. SYD SLM
10. Failure to record depreciation at year-end
results in 4. Which of the following should be reported when
a. Understated income an entity changed the expected service life of an
b. Understated assets asset?
c. Overstated expenses a. Cumulative effect of change in accounting
d. Overstated assets policy
b. Proforma effect of retroactive application
11. Which of the following is a counterbalancing c. Prior period error
error? d. An accounting change that should be reported
a. Understated depletion expense in the period of change and future periods
b. Bond premium under-amortized
c. Prepaid expense adjusted incorrectly 5. Which of the following is accounted for as a
d. Overstated depreciation expense change in accounting policy?
a. change in inventory valuation from fifo to
12. At year-end, an entity ordered merchandise weighted average method.
for resale. The merchandise was shipped f.o.b. b. change in depreciation method.
shipping point at year-end and the goods arrived c. change in estimated useful life of property, plant
early next year. The entity did not record the and equipment.
purchase in the current year and did not include d. change in the method of computing doubtful
the goods in ending inventory. The effects on the accounts expense.
financial statements for the current year were e. a change from cash basis to accrual basis of
a. Income and owners' equity were correct, accounting.
liabilities were incorrect, assets were correct.
b. Income and owners' equity were correct, assets 6. Which is the first step within the hierarchy of
and liabilities were incorrect. guidance when selecting accounting policies?
c. Income, assets, liabilities and owners' equity a. apply a standard from ifrs if it specifically
were correct. relates to the transaction.
d. Income, assets, liabilities and owners' equity b. apply the requirements in ifrs dealing with
were incorrect. similar and related issue.
c. consider the applicability of the definitions,
DO-IT-YOURSELF (DIY) recognition criteria and measurement concepts in
the conceptual framework.
1. A change in the periods benefited by a deferred d. consider the most recent pronouncements of
cost because additional information has been other standard-setting bodies.
obtained is
a. An accounting change reported in the period of 7. Which of the following is accounted for as a
change and future periods if the change affects change in accounting policy?
both a. A change in the estimated useful life of
b. An accounting change that should be reported property, plant and equipment
by restating the financial statements of all prior b. A change from cash basis to accrual basis of
periods presented A correction of an error accounting
c. a correction of an error c. A change from expensing immaterial
d. Not an accounting change expenditures to deferring and amortizing them
when material
2. When a company decides to switch from the d. A change in inventory valuation from FIFO to
double-declining balance method to the straight- average method
line method, this change should be handled as a
a. change in accounting estimate. 8. When it is difficult to distinguish between a
b. change in accounting policy. change in accounting estimate and a change in
c. correction of an error. accounting policy, the change is treated as
d. prior period adjustment. a. Change in accounting estimate with appropriate
disclosure
3. In 2022, an entity changed from sum-of-the- b. Change in accounting policy
years’ digits (SYD) method of depreciation to c. Correction of an error
4|Page

d. Change in accounting estimate with no c. Are unfavorable and indicative of conditions

appropriate disclosure that arose after the end of the reporting period
d. Provide of conditions that existed after the date
9. During the current year, an entity discovered the financial statements were authorized for issue.
that ending inventory reported in the financial
statements for the prior year was understated. 12. An entity decided to build and operate an
How should the entity account for this amusement park next year. The entity applied for
understatement? a letter of guarantee which was issued before the
a. Adjust the beginning inventory in the prior year. issuance of the financial statements of the current
b. Restate the financial statements with corrected year. What is the adjustment required at the
balances for all periods presented. current year-end?
c. Adjust the ending balance in retained earnings a. Book a long-term payable for the amount of
at current year-end. guarantee
d. Make no entry because the error will self- b. Disclose the guarantee as a contingent liability
correct c. Increase the contingency reserve
d. Do nothing
10. Events after the end of reporting period are
favorable or unfavorable events that occur 13. An entity built a new factory building during
between the current year. Subsequent to the current year-
a. The end of the reporting period and the date of end and before issuance of financial statements,
the next annual financial statements. the building was destroyed by fire and the claim
b. The end of the reporting period and the date of against the insurance entity proved futile because
the next interim or annual financial statements. the cause of the fire was negligence on the part of
c. The end of the reporting period. and the date the caretaker of the building.
when the financial statements are authorized for What should be reported at the current year-end?
issue. a. Write off the carrying amount of the building .
d. The end of reporting period and the date of the b. Make a provision for one-half of the carrying
next interim financial statements. amount of the building
c. Make a provision for three-fourths of the
11. Adjusting events are events that carrying amount of the building
a. Provide evidence of conditions that existed at d. Disclose the nonadjusting event in the notes to
the end of the reporting period. financial statements
b. Are favorable and indicative of conditions that
arose after the end of the reporting period

PROBLEM SOLVING :
1. The December 31 2023 financial statement of Flow G Company showed the following :
 January 1 2023 inventory was overstated by P20,000.
 December 31, 2023 inventory was overstated by P30,000.
 During 2023, Flow G received a 300,000 cash advance from a customer for merchandise to
be manufactured and shipped during 2024. The amount was credited to sales revenue.
 The net income reported on 2023 profit or loss before reflecting any adjustments for the
items above is P5,000,000.

What is the correct net income for the year ended December 31, 2023?
4,750K (5000+20+30-300)

2. Since its establishment three years ago, Loonie Abra has failed to acknowledge accruals and deferrals.

The following are the accruals and deferrals at the end of 2023 :
Prepaid expense P50,000
Accrued wages 75,000
Rent revenue collected in advance 90,000
Interest receivable 71,000

What is the effect of the above errors in the 2023 Income statement?
44K Overstated (50-75-90+71 = -44K note : + under, - over)

END OF PRACTICE SET