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Unformatted text preview: Question: TREPB-0001 Which of the following characteristics does not relate to prior period adjustments? Answers A : They can be specifically identified with business activity of a prior period. B : They have a material effect on income from continuing operations of the current year. C : They could not have been reasonably estimated in a prior period. D : They are attributable to economic events occurring subsequent to prior period financial statements. Answer Explanations A. Answer A is incorrect. Per SFAS 16, one of the characteristics of a prior period adjustment is that it can be specifically identified with business activity of a prior period. B. Answer B is incorrect. Per SFAS 16, one of the characteristics of a prior period adjustment is that it has a material effect on income from continuing operations of the current year. C. Answer C is incorrect. Per SFAS 16, one of the characteristics of a prior period adjustment is that the amount could not have been reasonably estimated in a prior period. D. Answer D is correct. Per SFAS 16, there are three criteria for a prior period adjustment. These criteria are as follows: (1) the effect of the adjustment is material to income from continuing operations, (2) the adjustment can be identified with a prior period, and (3) the amount of the adjustment could not be estimated in prior periods. SFAS 16 does not require that a prior period adjustment be attributable to economic events occurring subsequent to the prior period financial statements. Question: TREPB-0002 During 2009, Olsen Company discovered that the ending inventories reported on its financial statements were understated as follows: Year Understatement 2006 $50,000 2007 $60,000 2008 $0 Olsen ascertains year-end quantities on a periodic inventory system. These quantities are converted to dollar amounts using the FIFO cost flow method. Assuming no other accounting errors, Olsen’s retained earnings at December 31, 2008, will be. Answers A : $0 B : $ 60,000 understated. C : $ 60,000 overstated. D : $110,000 understated. Answer Explanations A. Answer A is correct. If ending inventory is understated, cost of goods sold is overstated, and net income is, therefore, understated. The opposite is true for beginning inventory. Since ending inventory of one period is the beginning inventory of the next period, errors in inventory determination affect income for only two consecutive periods. Thus, the error in 2006 will be offset in 2007, and the error in 2007 will be offset in 2008. Since ending inventory is correct in 2008, retained earnings for 2008 will be correct even though 2008 net income was overstated. This is summarized in the following table: 2006 2007 2008 Net Income 50,000 under *10,000 under 60,000 over Retained Earnings 50,000 under 60,000 under-0- * 2007 NI $10,000 under = $50,000 over + $60,000 under B. Answer B is incorrect. Refer to the correct answer explanation....
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This note was uploaded on 12/08/2009 for the course FAR 5745 taught by Professor Philoreily during the Spring '09 term at Nova Southeastern University.
- Spring '09