Multiple Choice
Prior period adjustments are reported in the:
12. Stockholders' Equity
Retained Earnings: Prior Period Adjustments
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A prior period adjustment requires an adjustment to which of the following accounts?
A
Current year expenses
B
Dividends declared during the current year
C
Retained Earnings, beginning balance
D
Current year revenues
Verified step by step guidance1
Understand the concept of a prior period adjustment: A prior period adjustment is made to correct errors or omissions in financial statements from previous periods. These adjustments are not related to the current year's revenues, expenses, or dividends but instead affect the beginning balance of retained earnings.
Identify the account impacted by prior period adjustments: Since prior period adjustments correct errors from previous periods, they are applied to the beginning balance of retained earnings. This ensures that the financial statements reflect accurate cumulative results.
Review the accounting treatment: Prior period adjustments are recorded directly in the retained earnings account in the equity section of the balance sheet. They do not flow through the income statement for the current year.
Consider the impact on financial reporting: Adjusting the beginning balance of retained earnings ensures that the financial statements provide a true and fair view of the company's financial position and performance over time.
Ensure proper disclosure: When a prior period adjustment is made, it must be disclosed in the financial statements, including the nature of the error, the amount of the adjustment, and its impact on prior periods.
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