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Question 12: 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 A represents possible clarifications of these
transactions as: a change in accounting principle, a change in accounting estimate, a correction of an
error in previously presented financial statements, or neither an accounting change nor an
accounting
error.
Item to Be Answered
Quo sells extended service contracts on its products. Because related services are performed over
several years, in 1993 Quo changed from the cash method to the accrual method of recognizing
income
from these service contracts.
List A (Select one)
A. Change in accounting principal.
B. Change in accounting estimate.
C. Correction of an error in previously presented financial statements.
D. Neither an accounting change nor an accounting error.
Correct Answer: C
Explanation:
Choice "c" is correct. Change from the cash method to the accrual method is a correction of an error
in
previously presented financial statements.