✅ 30 CPA Practice Questions: Accounting Changes & Error Corrections

Each question tests key concepts from the CPA FAR exam and includes four confusing choices, just like the actual test. The answers are provided at the end.

---

✅ Questions 1–10: Change in Accounting Principle

1. A company changes from FIFO to LIFO. How should this be treated under U.S. GAAP?

A. Prospectively
B. Retrospectively
C. As an error correction
D. No adjustment required

---

2. A company switches from completed-contract to percentage-of-completion for long-term contracts. This should be:

A. Prospective
B. Error correction
C. Retrospective
D. Not allowed

---

3. Changing inventory valuation from Weighted Average to FIFO impacts:

A. Only current year
B. Prior periods only
C. All periods prospectively
D. Prior periods retrospectively

---

4. Which of the following is not a change in principle?

A. LIFO to FIFO
B. Straight-line to DDB
C. Completed to percentage-of-completion
D. Average cost to FIFO

---

5. When a company adopts a new GAAP method for a new type of transaction, this is:

A. Change in estimate
B. Error correction
C. Not a change
D. Change in principle

---

6. TechCorp changes its revenue recognition from point-in-time to over-time. What should be disclosed?

A. No disclosure
B. Nature, reason, and impact
C. Only the cumulative effect
D. Journal entries

---

7. Which change is most likely to require retrospective application?

A. Useful life from 5 to 3 years
B. Switching from straight-line to DDB
C. Changing from completed-contract to percentage-of-completion
D. Updating warranty expense %

---

8. When a change in principle is made, prior year financials:

A. Must always be restated
B. Are restated unless impractical
C. Are ignored
D. Are restated prospectively

---

9. Which entry reflects a retrospective adjustment for a change in principle?

A. Dr. Retained Earnings, Cr. Depreciation Expense
B. Dr. Inventory, Cr. Retained Earnings
C. Dr. Retained Earnings, Cr. Inventory
D. Dr. Revenue, Cr. Retained Earnings

---

10. A company switches from LIFO to FIFO. What is the correct journal entry if ending inventory increases by $40,000?

A. Dr. COGS $40,000, Cr. Inventory $40,000
B. Dr. Retained Earnings $40,000, Cr. Inventory $40,000
C. Dr. Inventory $40,000, Cr. Retained Earnings $40,000
D. No entry; just disclose

---

✅ Questions 11–20: Change in Estimate

11. Which is a change in estimate?

A. LIFO to FIFO
B. Changing depreciation method
C. Useful life from 5 to 8 years
D. Recording an omitted liability

---

12. How is a change in estimate recorded?

A. Retrospective
B. Journal entries in past periods
C. Cumulative adjustment to equity
D. Prospective application only

---

13. Which change is a combo of estimate and principle?

A. Inventory valuation
B. Switching from average to FIFO
C. Straight-line to double declining balance
D. FIFO to LIFO

---

14. ABC Co. revises its expected warranty claims based on new data. This is:

A. Retrospective
B. Prospective
C. Error
D. Change in entity

---

15. If the estimated bad debt % increases from 2% to 5%, what is the journal entry?

A. Dr. Bad Debt Expense, Cr. Allowance for Doubtful Accounts
B. Dr. Allowance, Cr. Retained Earnings
C. Dr. Retained Earnings, Cr. AR
D. Dr. AR, Cr. Cash

---

16. A company’s revised depreciation increases expense by $20,000/year. How is this applied?

A. Back to original purchase date
B. Only to future periods
C. To current and future years
D. Retroactively with equity adjustment

---

17. Which is treated the same as a change in estimate?

A. Change in entity
B. Error
C. Change in depreciation method
D. Change in inventory cost flow

---

18. Obsolete inventory is revalued downward. This is:

A. Change in principle
B. Error
C. Change in estimate
D. Prior-period adjustment

---

19. Which of the following requires retrospective restatement?

A. Change in segment reporting
B. Correction of a math error
C. Change in depreciation
D. Inclusion of a new subsidiary

---

20. What is the accounting treatment for an increase in estimated warranty expense from $50,000 to $60,000?

A. Dr. Warranty Expense $60,000, Cr. Warranty Liability $60,000
B. Dr. Warranty Expense $10,000, Cr. Warranty Liability $10,000
C. Dr. Warranty Liability $10,000, Cr. Warranty Expense $10,000
D. Dr. Warranty Liability $10,000, Cr. Retained Earnings $10,000

---

✅ Questions 21–25: Change in Reporting Entity

21. Which is an example of a change in reporting entity?

A. Adding a new segment
B. Consolidating a previously unconsolidated subsidiary
C. Moving from LIFO to FIFO
D. Changing useful life

---

22. Changes in reporting entity require:

A. No adjustment
B. Prospective treatment
C. Restatement of prior periods
D. Correction via retained earnings

---

23. What type of disclosure is needed for reporting entity changes?

A. None
B. Only journal entries
C. Footnote about comparability
D. Revenue impact only

---

24. Journal entry required for change in reporting entity?

A. Yes, always
B. No journal entry
C. Only retained earnings
D. Only for errors

---

25. Which of the following requires retrospective restatement?

A. Change in segment reporting
B. Correction of a math error
C. Change in depreciation
D. Inclusion of a new subsidiary

---

✅ Questions 26–30: Error Corrections

26. Capitalizing repairs instead of expensing is:

A. Change in principle
B. Change in estimate
C. Error
D. Change in entity

---

27. Errors are corrected:

A. Prospectively
B. With equity adjustment
C. Retrospectively
D. Over 5 years

---

28. Which is NOT an error?

A. Omitted liability
B. Misstated depreciation
C. Change in estimate
D. Misclassified expense

---

29. Unearned revenue recorded as earned last year. How to fix?

A. Reverse revenue in current year
B. Restate prior year income
C. Adjust future income
D. No correction

---

30. Which entry corrects an error from prior years?

A. Dr. Depreciation Expense, Cr. Accumulated Depreciation
B. Dr. Retained Earnings, Cr. Equipment
C. Dr. Retained Earnings, Cr. Revenue
D. Dr. Expense, Cr. Retained Earnings

Below are the detailed explanations for each question, explaining why each answer is correct or wrong:

---

✅ Questions 1–10: Change in Accounting Principle

1. A company changes from FIFO to LIFO. How should this be treated under U.S. GAAP?

Correct Answer: A. Prospectively

• Explanation: Under U.S. GAAP, a change from one inventory method (like FIFO) to another (like LIFO) is generally applied prospectively, meaning that the change affects the financial statements moving forward, without revising prior period financials.

✅ Here's why a change from FIFO to LIFO is treated prospectively under U.S. GAAP:

Reason	Explanation
a. LIFO Exception Rule	U.S. GAAP typically requires retrospective application for a change in accounting principle unless it's impracticable. Changing to LIFO is considered impracticable to apply retrospectively. Why? Because it would require recreating historical inventory layers that may no longer exist.
b. Inventory Layering Complexity	LIFO involves tracking layers of inventory costs from previous years. If the company didn’t track these layers previously (under FIFO), it’s not feasible to reconstruct them accurately.
c. GAAP’s Explicit Guidance	ASC 250 (Accounting Changes and Error Corrections) specifically states that LIFO is applied prospectively, making it a special exception to the retrospective rule for accounting principle changes.

2. A company switches from completed-contract to percentage-of-completion for long-term contracts. This should be:

Correct Answer: C. Retrospective

• Explanation: A change in the method of revenue recognition (like switching from completed-contract to percentage-of-completion) is generally treated retrospectively, meaning the company must restate prior periods to reflect the new method.

3. Changing inventory valuation from Weighted Average to FIFO impacts:

Correct Answer: D. Prior periods retrospectively

• Explanation: The change in the inventory method (Weighted Average to FIFO) requires retrospective application, which means that prior periods are restated as though FIFO had always been used.

4. Which of the following is not a change in principle?

Correct Answer: B. Straight-line to DDB

• Explanation: Changing the depreciation method (like from straight-line to double-declining balance) is a change in estimate, not a principle. A change in principle involves a change in the underlying accounting method, like switching from LIFO to FIFO.

5. When a company adopts a new GAAP method for a new type of transaction, this is:

Correct Answer: D. Change in principle

• Explanation: When a company adopts a new GAAP method for a new type of transaction, it is considered a change in accounting principle because it involves the application of a new method or standard.

6. TechCorp changes its revenue recognition from point-in-time to over-time. What should be disclosed?

Correct Answer: B. Nature, reason, and impact

• Explanation: A change in revenue recognition methods requires disclosure of the nature of the change, the reason for it, and the impact it has on financial statements.

7. Which change is most likely to require retrospective application?

Correct Answer: C. Changing from completed-contract to percentage-of-completion

• Explanation: This change in accounting method requires retrospective application, meaning prior periods must be restated.

8. When a change in principle is made, prior year financials:

Correct Answer: B. Are restated unless impractical

• Explanation: Generally, prior years should be restated, but if it is impractical to do so (e.g., due to unavailable data), the company may apply the change prospectively.

9. Which entry reflects a retrospective adjustment for a change in principle?

Correct Answer: C. Dr. Retained Earnings, Cr. Inventory

• Explanation: Retrospective adjustments for a change in principle (like moving from FIFO to LIFO) would result in adjustments to retained earnings to reflect the cumulative effect of the change.

10. A company switches from LIFO to FIFO. What is the correct journal entry if ending inventory increases by $40,000?

Correct Answer: C. Dr. Inventory $40,000, Cr. Retained Earnings $40,000

• Explanation: When switching from LIFO to FIFO, if inventory increases, the adjustment is made to both inventory and retained earnings, reflecting the cumulative effect of the change.

---

✅ Questions 11–20: Change in Estimate

11. Which is a change in estimate?

Correct Answer: C. Useful life from 5 to 8 years

• Explanation: Changes in estimates, such as altering the useful life of an asset, are prospective and do not require restatement of prior periods.

12. How is a change in estimate recorded?

Correct Answer: D. Prospective application only

• Explanation: A change in estimate, like changing the useful life of an asset, is applied prospectively, meaning it affects the current and future periods but does not require restatement of prior periods.

13. Which change is a combo of estimate and principle?

Correct Answer: C. Straight-line to double declining balance

• Explanation: Switching depreciation methods (e.g., from straight-line to double-declining balance) is both a change in accounting principle (method) and an estimate (useful life or residual value).

14. ABC Co. revises its expected warranty claims based on new data. This is:

Correct Answer: B. Prospective

• Explanation: Revisions to estimates, such as adjusting the expected warranty claims, are handled prospectively, meaning the change is applied in the future and does not affect prior periods.

15. If the estimated bad debt % increases from 2% to 5%, what is the journal entry?

Correct Answer: A. Dr. Bad Debt Expense, Cr. Allowance for Doubtful Accounts

• Explanation: An increase in the bad debt estimate requires a journal entry to recognize the higher expense, which is credited to the allowance for doubtful accounts.

16. A company’s revised depreciation increases expense by $20,000/year. How is this applied?

Correct Answer: C. To current and future years

• Explanation: Changes in estimates (like depreciation) are applied prospectively, meaning they affect only the current and future periods.

17. Which is treated the same as a change in estimate?

Correct Answer: C. Change in depreciation method

• Explanation: A change in depreciation method is treated as a change in estimate, because it involves adjusting the estimated pattern of expense recognition over time.

18. Obsolete inventory is revalued downward. This is:

Correct Answer: C. Change in estimate

• Explanation: When obsolete inventory is written down, it is considered a change in estimate as it reflects a new assessment of the inventory’s value.

19. Which of the following requires retrospective restatement?

Correct Answer: D. Inclusion of a new subsidiary

• Explanation: When a new subsidiary is included, prior periods must often be restated to reflect the new consolidated group.

20. What is the accounting treatment for an increase in estimated warranty expense from $50,000 to $60,000?

Correct Answer: B. Dr. Warranty Expense $10,000, Cr. Warranty Liability $10,000

• Explanation: An increase in estimated warranty expense is a change in estimate and is applied prospectively by adjusting the warranty liability for the future periods.

---

✅ Questions 21–25: Change in Reporting Entity

21. Which is an example of a change in reporting entity?

Correct Answer: B. Consolidating a previously unconsolidated subsidiary

• Explanation: A change in reporting entity occurs when a company changes the entities it includes in its financial statements, such as consolidating a previously unconsolidated subsidiary.

22. Changes in reporting entity require:

Correct Answer: C. Restatement of prior periods

• Explanation: Changes in reporting entity require retrospective application, meaning prior periods must be restated to reflect the new reporting entity.

23. What type of disclosure is needed for reporting entity changes?

Correct Answer: C. Footnote about comparability

• Explanation: Companies must disclose the nature of the change in the footnotes and how the change affects the comparability of financial statements.

24. Journal entry required for change in reporting entity?

Correct Answer: B. No journal entry

• Explanation: A change in reporting entity typically does not require a journal entry. Instead, it requires disclosure and retrospective restatement of prior periods.

25. Which of the following requires retrospective restatement?

Correct Answer: D. Inclusion of a new subsidiary

• Explanation: When a new subsidiary is included in the consolidated financial statements, prior periods must be restated to include the new subsidiary.

---

✅ Questions 26–30: Error Corrections

26. Capitalizing repairs instead of expensing is:

Correct Answer: C. Error

• Explanation: Misclassifying expenses, such as capitalizing repairs instead of expensing them, is an error that requires correction.

27. Errors are corrected:

Correct Answer: C. Retrospectively

• Explanation: Errors are corrected retrospectively, meaning prior period financial statements are restated to reflect the correct accounting treatment.

28. Which is NOT an error?

Correct Answer: C. Change in estimate

• Explanation: A change in estimate is not an error. It is a necessary adjustment based on new information or revised expectations.

29. Unearned revenue recorded as earned last year. How to fix?

Correct Answer: B. Restate prior year income

• Explanation: The correction of revenue recognition requires restating the prior year’s income to reflect that the revenue should have been recorded as unearned.

30. Which entry corrects an error from prior years?

Correct Answer: C. Dr. Retained Earnings, Cr. Revenue

• Explanation: An error in revenue recognition is corrected by adjusting retained earnings and the revenue account to reflect the correction in prior years.
  
  
  

  Here’s a simplified tabular summary of key exam tips for Accounting Changes and Error Corrections:

Topic	Key Tip	Details
Types of Changes	Understand different types of changes	- Change in Accounting Principle: FIFO to LIFO, etc. - Change in Estimate: Depreciation, bad debt % - Change in Reporting Entity: Subsidiary consolidation
Retrospective vs Prospective	Know when to apply retrospective vs prospective treatment	- Retrospective: Applied to changes in principle, reporting entity, and errors (restates prior periods). - Prospective: Applied to estimates (affects only future periods).
Journal Entries	Focus on preparing accurate journal entries	- Accounting Changes: Adjust retained earnings. - Error Corrections: Adjust retained earnings for prior periods, no adjustment to estimates or future periods.
Disclosure Requirements	Disclosures are crucial for transparency	- Always disclose the nature, reason, and impact of changes or corrections in financial statements. - Changes must be disclosed in footnotes.
Numerical Questions	Practice numerical examples for changes and errors	- Calculate impact on net income, EPS, retained earnings for changes. - Correct prior period errors and apply retrospective adjustments.
Terminology	Use precise terminology	- Retrospective Restatement: Used for errors and principle changes. - Prospective Application: Used for estimates and future periods.
Materiality	Understand when an error is material or immaterial	- Material errors require correction in prior periods. - Immaterial errors may not need correction, but you should still be able to identify when to correct them.
Special Treatment	Know when special treatment applies (e.g., percentage-of-completion method)	- Some changes, like in long-term contracts, may require retrospective application even if you might assume a different treatment.
Revise Practice Questions	Practice with a focus on journal entries and disclosures	- Go through practice questions that involve changes and corrections. - Focus on timing, disclosures, and accurate application of retrospective or prospective treatment.
Key Standards	Familiarize with relevant standards (FASB ASC or IFRS)	- Know ASC 250 for accounting principles changes. - Know ASC 270 for estimates and corrections. - Know IFRS equivalents if relevant to your exam.

Exam Tips at a Glance:

• Mnemonic: "PREP like a CPA" (P - Principle, E - Estimate, R - Reporting Entity, S - Error correction)

• Focus on Journal Entries for changes and corrections.

• Retrospective treatment for principle, reporting entity, and errors; Prospective for estimates.

• Disclose all changes and corrections in financial statement footnotes.
  
  
  

  Category	What It Means	Treatment	Restate Prior Periods?	Journal Entry?	Disclose?
  Change in Principle	Switching between GAAP methods (e.g., FIFO to Avg Cost)	Retrospective	✅ Yes	✅ Adjust Retained Earnings	✅ Yes
  Change in Estimate	New data or experience (e.g., useful life, bad debts)	Prospective	❌ No	✅ Affect current & future only	✅ Yes
  Change in Entity	Adding/removing entities from consolidation	Retrospective	✅ Yes	❌ No direct entry	✅ Yes
  Error Correction	Fixing past mistakes (e.g., misapplied GAAP or omissions)	Retrospective	✅ Yes	✅ Adjust Retained Earnings	✅ Yes

  
  
  

  🎯 Must-Know Mnemonic: PREP

  P	Principle → Retrospective
  R	Reporting Entity → Retrospective
  E	Estimate → Prospective
  P	Prior-period Error → Retrospective

  📌 Tip: If it’s not new info, it’s usually Retrospective!

  ---

  ✅ Quick Revision Tips

  Tip #	Exam Strategy
  1	Journal entries only for principles and errors, not for changes in entity
  2	Watch for inventory, depreciation, and revenue methods — often tested
  3	For estimates, focus on going forward only — no restatement!
  4	In simulations, footnotes and disclosures are fair game — practice writing!
  5	Know the difference between a change and an error — it's often tricky!
  6	Use mnemonics (PREP) and scenario elimination when unsure
  7	Practice numerical questions on retrospective adjustments