D105 Intermediate Accounting III - Set 4 - Part 3

Correct Answer: Balance sheet errors

Balance sheet errors affect only the presentation of assets, liabilities, or equity but do not impact the income statement.

Correct Answer: Income statement errors

Income statement errors impact the presentation of revenue, expense, gain, or loss accounts but do not affect the balance sheet.

Correct Answer: Balance sheet and income statement errors

Some errors, such as those involving revenue or expense recognition, affect both the balance sheet (retained earnings) and the income statement.

Correct Answer: Two periods

Counterbalancing errors correct themselves over two periods, typically because they relate to timing differences.

Correct Answer: Longer than two periods

Noncounterbalancing errors take longer than two periods to correct themselves and typically require a journal entry to fix the error.

Correct Answer: Change to compensation expense for bonuses earned in the prior period that are paid in the subsequent period

Adjustments for prior period compensation expenses that were not recorded correctly are treated as corrections of errors.

Correct Answer: As a prior period adjustment

A failure to record depreciation is considered an error, and it must be corrected as a prior period adjustment when discovered.

Correct Answer: Bonus payments

Companies often choose accounting methods that will maximize reported income, thereby increasing bonus payments tied to net income.

Correct Answer: Recording an incorrect inventory value due to a mathematical mistake

Errors that result from mathematical mistakes, such as incorrectly recording inventory values, are considered accounting errors and must be corrected.

Correct Answer: Companies need to disclose the effect on income from operations, the related per share amounts for the current period, and why the new method is preferred

A change in depreciation method is a change in accounting estimate, and the company must disclose the reason for the change and its effect on income in the current period.