Financial Accounting and Reporting-CPA Practice Exam

A change in method of accounting for Long-Term Construction Contracts is classified as what type of change?

1. A change in accounting estimate

2. A change in accounting principle

3. A change in accounting policy

4. A change in accounting disclosure

The correct answer is: A change in accounting principle

A change in the method of accounting for long-term construction contracts is classified as a change in accounting principle because it involves a shift from one generally accepted accounting principle (GAAP) to another. This type of change reflects the adoption of a different approach to recognizing revenue and expenses associated with the construction project. For instance, a company might switch from the completed contract method to the percentage-of-completion method, which fundamentally alters how financial results are reported. When a company makes such a change, it must apply it retrospectively, meaning it should adjust prior periods' financial statements as if the new principle had always been applied. This ensures consistency in financial reporting over time, allowing users of the financial statements to make better comparisons across periods. The other classifications are not applicable in this case. A change in accounting estimate refers to adjustments related to the future, like estimating the useful life of an asset, which does not involve a new principle. A change in accounting policy typically refers to a shift in the application of a particular principle within the context of a set of policies but does not imply adopting an entirely different accounting principle. Lastly, a change in accounting disclosure pertains to the manner in which information is presented in financial statements rather than a change in how financial transactions are measured