The following questions dealing with accounting changes and errors are adapted from questions that previously appeared on Certified Management Accountant (CMA) examinations. The CMA designation sponsored by the Institute of Management Accountants (www.imanet.org) provides members with an objective measure of knowledge and competence in the field of management accounting. Determine the response that best completes the statements or questions.
1. A change in the liability for warranty costs requires
a. presenting prior-period financial statements as previously reported.
b. presenting the effect of pro forma data on income and earnings per share for all prior periods presented.
c. reporting an adjustment to the beginning retained earnings balance in the statement of retained earnings.
d. reporting current and future financial statements on the new basis.
2. In a review of the May 31, 2011, financial statements during the normal year-end closing process, it was discovered that the interest income accrual on Simpson Company's notes receivable was omitted. The amounts omitted were calculated as follows:
May 31, 2010 $ 91,800
May 31, 2011 100,200
The May 31, 2011, entry to correct for these errors, ignoring the effect of income taxes, includes a
a. credit to retained earnings for $91,800.
b. credit to interest revenue for $91,800.
c. debit to interest revenue for $100,200.
d. credit to interest receivable for $100,200.
3. An example of an item that should be reported as a prior-period adjustment in a company's annual financial statements is
a. a settlement resulting from litigation.
b. an adjustment of income taxes.
c. a correction of an error that occurred in a prior period.
d. an adjustment of utility revenue because of rate revisions ordered by a regulatory commission.