- CFA Exams
- CFA Level I Exam
- Study Session 7. Financial Reporting and Analysis (2)
- Reading 21. Understanding Income Statements
- Subject 6. Non-Recurring Items and Non-Operating Items
CFA Practice Question
Which of the following is correct regarding accounting changes?
II. The cumulative impact on prior period earnings is reported net of tax after extraordinary items and discontinued operations on the income statement.
III. Footnote disclosure is required to indicate the impact of the change on current period operations.
I. They generally do not have cash flow consequences.
II. The cumulative impact on prior period earnings is reported net of tax after extraordinary items and discontinued operations on the income statement.
III. Footnote disclosure is required to indicate the impact of the change on current period operations.
A. II and III
B. I and III
C. I, II and III
Explanation: The following relates to accounting changes:
- The cumulative impact on prior period earnings is reported net of tax after extraordinary items and discontinued operations on the income statement.
- Footnote disclosure of the impact of the change on current period operations is required.
User Contributed Comments 9
| User | Comment |
|---|---|
| kaliokale | 1 is not true. Lets say switching from SLD to DDM... that definitely affects depreciation and so, CFO. |
| gill15 | They do have CF consequences so I is not correct. for example, if you change from LIFO to FIFO your Net Income changes and therefor changes your cash flows. |
| dini85 | @ Kaliokale: Depreciation is a non-cash item.. so not cash flow impact. gill15's example is correct. |
| alles | depreciation affects cash flow because it influences NI and, thus, taxes. |
| Lambo83 | Accounting changes affect profit and hence tax paid which is an operating cash flow. Answer should be 1, 2 and 3. Anyone agree? |
| Lambo83 | For example moving from FIFO to LIFO will lower Pretax Income and hence decrease the tax required to pay |
| jyoti | Lambo83: you are confusing tax accounting with finance accounting. The accounting income can be (and most likely will be) different from tax income. |
| ecapocas | Not always different. There are a LOT of accounting changes that are also acceptable for tax accounting (most notably LIFO/FIFO) that also impact Cash Flow. Besides which, for the phrase "generally" to be true, it would need to be a rare policy change. The most common change in accounting policy is inventory accounting, which DOES have a tax impact. Therefore the phrase "generally true" can not be said to apply to the statement "accounting policies do not impact cash flow". |
| devshah225 | gill15's example is wrong because though it changes the NI but the CFO gets adjusted because of change in inventory. alles is correct, the only cash flow impact will be due to taxes |