[Anonymous]

Which of the following items requires a prior period adjustment to retained earnings?

A. Purchases of inventory this year were overstated by $5 million.

B. Available-for-sale securities were improperly valued last year by $20 million.

C. Revenue of $5 million that should have been deferred was recorded in the previous year as earned.

D. The prior year’s foreign currency translation gain of $2 million was never recorded.

Answer C. Prior period adjustments to retained earnings are only reported for errors in prior-year financial statements that resulted in an incorrect balance in retained earnings at the beginning of the year. These adjustments are not required for errors that affect the current year because these errors do not affect prior-year balances, and current-year income should be corrected if current-year errors are detected before the financial statements are published. Prior-year errors in reporting other comprehensive income do not affect the beginning balance of retained earnings. Rather, they result in erroneous balances in accumulated other comprehensive income.

---

Shouldn’t the answer be E, all of the above? I mean, what makes C stand out from the rest?

[Anonymous]

I believe B and D don't affect the income statement and => retained earnings, those are BS accounts. A is for this year, no need to re state prior period for this year error

C directly affects income

[Thrawn]

A is a current period change, so you would correct it now.

B is a mark to market change, since they are AFS the gain loss goes to OCI so it wouldn't impact RE.

C is an adjustment to prior year income, which flows to RE

D CTA doesn't hit income, it hits OCI so it wouldnt go to RE.

BEC 87 Feb 14
REG 84 Apr 14
FAR 82 Nov 14
AUD 86 Feb 15

[Author]

Replies