Unsure Inc. made a very large arithmetical error in the preparation of its year-end financial statements by incorrect placement of a decimal point in the calculation of depreciation. The error caused the net income to be reported at almost double the correct amount. When Unsure discovered the error in the following year, correction of the error should be treated as a(n)
A) adjustment to beginning retained earnings, net of tax.
B) increase in depreciation expense for the year in which the error is discovered.
C) gain for the year in which the error was made.
D) component of income for the year in which the error is discovered, but separately listed on the income statement and fully explained in a note to the financial statements.

Question

Quizplus · Accepted Answer

Errors in financial statements of prior periods are corrected by adjusting the opening balance of retained earnings in the period in which the error is discovered. This adjustment is made net of any related tax effects.