# Corrections of errors that occurred on a previous period’s financial statements are called ________. A. restrictions B. deficits C. prior period adjustments D. restatements

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### Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685

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### Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685
Chapter 14, Problem 18MC
Textbook Problem
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## Corrections of errors that occurred on a previous period’s financial statements are called ________.A. restrictionsB. deficitsC. prior period adjustmentsD. restatements

To determine

Introduction:

Prior period adjustments are reported on a company’s statement of retained earnings as an adjustment to the beginning balance of retained earnings. By directly adjusting beginning retained earnings, the adjustment has no effect on current period net income. The goal is to separate the error correction from the current period’s net income to avoid distorting the current period’s profitability.

To choose:

The correct option.

### Explanation of Solution

Explanation for correct answer:

Prior period adjustments are rectifications of errors that appeared on previous periods’ financial statements. These errors can occur from mathematical errors, misinterpretation of GAAP, or a misunderstanding of facts at the time the financial statements were prepared.

Many errors impact the retained earnings account whose balance is carried forward from the previous period. Since the financial statements have already been issued, they must be corrected. The correction involves changing the financial statement amounts to the amounts they would have been had no errors occurred, a process known as restatement. In other words, prior period adjustments are a way to go back and correct past financial statements that were wrongly prepared because of a reporting error.

Explanation for incorrect answers:

A. Restrictions − Retained earnings is often subject to certain restrictions...

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