Which of the following would not be accounted for using the retrospective approach?

a) A change from LIFO to FIFO inventory costing.

b) A change from the equity method of accounting for investments.

c) A change in accounting for long-term construction contracts by recognizing revenue over time rather than when the contract is completed.

d) A change in depreciation methods.

Question

Business

Michael Humphrey

27 November, 19:41

Which of the following would not be accounted for using the retrospective approach?

a) A change from LIFO to FIFO inventory costing.

b) A change from the equity method of accounting for investments.

c) A change in accounting for long-term construction contracts by recognizing revenue over time rather than when the contract is completed.

d) A change in depreciation methods.

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Answers (1)

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Paris Price · Answer 1

C) A change in accounting for long-term construction contracts by recognizing revenue over time rather than when the contract is completed.

Explanation:

The IRS allows long term construction projects to use two methods of accounting: completed contract method and percentage of completion method.

For residential projects or small long term construction projects, the completed contract method is used. The contractor doesn't recognize revenue or expenses until the contract is completed. For nonresidential long term construction projects, the percentage of completion method is used. The contractor recognizes revenue and expenses over time as the construction project advances.

When you use the retrospective approach, you must determine the cumulative effect of changing the accounting system. This could work if the accounting method is changed from percentage of completion method to completed contract method, but not vice versa.