1.1 Brief Background of the Study
Deciding to incur a prior period adjustment implies severe complications towards the stability of the company. Those prior period adjustments are based on the prepared financial statements. Financial Statements are the record of the financial activities of business, person or an entity. Financial Statements are prepared after the adjusting entries have made or entered into a worksheet. There are several reasons why a certain company uses financial statements. First of all, they wanted to see the financial performance of their company whether it is good or not. With this, they can actually think of the best way on how they can improve the condition and performance of their company. Second, they are in line with the GAAP (Generally Accepted Accounting Principles) that helps a certain company to see on how their management had reached their stability. Lastly, these Financial Statements are of big help for the accountants to easily locate the errors they have made in the past transactions. And with these, a prior period adjustment has to be made. Prior Period Adjustment is the correction of an error in the financial statements on a prior period. A Prior Period Adjustment is needed to be done so that accountants can change or correct the error they made on a specific period of time. It is important to do this prior period adjustment so that a company’s financial condition would not be overstated nor understated. 1.2 The Statement of the Problem
For an instance, most companies use either of the two kinds of approaches in manipulating financial statements. First, is to inflate current period earnings on the income statement by artificially inflating revenue and gains or by deflating current period expenses. Second, it requires the exact opposite strategy, which is to deflate current period earnings on the income statement by inflating current period expenses or by deflating revenue. However, these two...