Watts Corporation Made a Very Large Arithmetical Error in the Preparation

question 23

Multiple Choice

Watts Corporation made a very large arithmetical error in the preparation of its year-end financial statements by improper placement of a decimal point in the calculation of depreciation. The error caused the net income to be reported at almost double the proper amount. Correction of the error when discovered in the next year should be treated as

• A) an increase in depreciation expense for the year in which the error is discovered.
• B) a component of income for the year in which the error is discovered, but separately listed on the income statement and fully explained in a note to the financial statements.
• C) an other expense item for the year in which the error was made.
• D) a prior period adjustment.

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Definitions:

Investments

The act of allocating resources, usually money, with the expectation of generating an income or profit.

Single Index Model

A simplified financial model that describes the return of a security as a linear function of the return of a single market index, plus some random noise.

Portfolio

A diverse collection of investments held by an individual or institution, including stocks, bonds, real estate, or other financial assets, designed to reduce risk and achieve specific financial goals.

Beta

A measure of the volatility, or systemic risk, of a security or a portfolio in comparison to the market as a whole.