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Which of the following is not considered a direct effect of a change in accounting

principle?
A. An employee profit-sharing plan based on net income when a company uses the
percentage-of-completion method.
B. The inventory balance as a result of a change in the inventory valuation method.
C. An impairment adjustment resulting from applying the lower-of-cost-or-market-test to
the adjusted inventory balance.
D. Deferred income tax effects of an impairment adjustment resulting from applying the
lower-of-cost-or-market test to the adjusted inventory balance.

1 Answer

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Final answer:

The effect that is not considered a direct result of a change in accounting principle is the deferred income tax effects of an impairment adjustment, as these are secondary consequences of how the change affects financials and subsequent tax computations. Option d.

Step-by-step explanation:

The question pertains to changes in accounting principles and which of the listed effects would not be considered a direct effect of such a change. A direct effect results immediately and exclusively from the change itself. Answer option A refers to an employee profit-sharing plan that relies on net income, which can be affected by a change in revenue recognition like the percentage-of-completion method. Option B pertains to the inventory balance, which would directly change following an alteration in inventory valuation methods. Option C involves an impairment adjustment due to applying the lower-of-cost-or-market test, which is a direct consequence of re-evaluating the inventory. Lastly, option D falls into a different category as it involves deferred income tax effects of an impairment adjustment, which are secondary consequences arising from how the change in principle affects the tax calculation.

Therefore, the correct answer is D. The deferred income tax effects are not a direct effect of a change in accounting principle but are instead a secondary consequence of how that change impacts the financials, which then affects the tax computation.

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