In Situations Where the Change in Accounting Principle Has Both

question 74

Multiple Choice

In situations where the change in accounting principle has both direct and indirect effects on prior years' income, GAAP states that a company recognize

• A) only the direct effect retrospectively.
• B) the direct effect and discuss the indirect effect in the notes to the financial statements.
• C) only the indirect effect.
• D) the direct effect prospectively.

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Definitions:

Total Cost

The total cost is the sum of fixed and variable costs incurred in the production of goods or services.

Economic Profit

The difference between total revenue and the total costs of inputs, including both explicit and implicit costs.

Normal Profit

The minimum profit necessary for a company to remain competitive in the market, essentially covering its opportunity costs.

Competitive Firm

A company that operates in a market where there are many buyers and sellers, and no single entity can control the market price of goods or services.