1. What is the effect of a change in accounting estimate on the financial statements? - A) It affects only current and future periods. - B) It affects only past periods. - C) It affects both past and future periods. - D) No effect on the financial statements. Answer: A) It affects only current and future periods. Rationale: Changes in accounting estimates are applied prospectively and do not affect past periods. 2. How should a company report a change in accounting principle? - A) Retrospectively, by restating prior periods. - B) Prospectively, by including the effect in current and future periods. - C) By reporting a cumulative effect of the change in the current period. - D) No reporting is required. Answer: A) Retrospectively, by restating prior periods. Rationale: A change in accounting principle is generally accounted for by retrospectively adjusting financial statements for prior periods, if practicable. 3. When accounting for inventories, what is the difference between the FIFO and LIFO methods? - A) FIFO assumes the last items purchased are the first ones sold. - B) LIFO assumes the first items purchased are the first ones sold. - C) FIFO results in higher taxes during inflationary periods. - D) LIFO results in lower cost of goods sold during deflationary periods. Answer: B) LIFO assumes the first items purchased are the first ones sold. Rationale: LIFO (Last-In, First-Out) assumes that the most recently purchased items are sold first, which can lead to lower reported profits and taxes during inflationary periods. 4. What is the primary objective of financial reporting? - A) To maximize the company's stock price. - B) To provide information useful for making economic decisions. - C) To report the company's compliance with tax laws.