Question

When a company changes an accounting principle under the retrospective approach, what does it do to its financial statements for each prior period presented?

1) It adjusts its financial statements for each prior period presented.
2) It does not adjust its financial statements for each prior period presented.
3) It adjusts its financial statements only for the current period.
4) It adjusts its financial statements only for the future period.

Answer 1

A company adopting the retrospective approach restates its comparative financial statements to reflect the change in accounting principle as if it had always been used.

Step-by-step explanation:

When a company changes an accounting principle and adopts the retrospective approach, it makes adjustments to its financial statements for each prior period presented. This means that the company should restate its comparative financial statements as if the new accounting principle had always been in place. Consequently, the prior periods' financial statements reflect the use of the new principle. This approach provides consistency and comparability over time for financial statement users.