Practice Quiz

Case Interview Prep

Category - Accounting

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If Larry’s Lobsters hires an accountant who decides to change their book depreciation method from the double-declining balance method to the straight-line method, how would this change be noted?
  1. As a discontinued operation on the income statement.
  2. As an extraordinary item on the income statement.
  3. As a note on the balance sheet.
  4. As a change in accounting principle on the income statement.
  5. As an e-mail to Larry’s Lobsters employees.
Explanation
Answer - D - The change in the depreciation method from double-declining to the straight-line method would be a change in accounting principle, noted on the income statement.

Key Takeaway: There are three types of accounting changes:

· Changes in accounting principle (ex. Straight-line to accelerated depreciation)
· Changes in accounting estimates (ex. Useful lives of PPE, bad debts %)
· Changes in reporting entity

Each of these is handled differently. For some changes in accounting principle, retroactive changes must be made to allow year-to-year comparisons. GAAP is the source to determine if retroactive changes must be made to the financial statements.
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