Final answer:
A restatement is used to correct errors in previously issued financial statements, adjusting past figures like net income to accurately reflect historical financial performance.
Step-by-step explanation:
A restatement communicates the impact of the error on prior periods' net income.
When a financial error is discovered in previously issued financial statements, the entity must correct these inaccuracies. The process used to correct the errors is known as a restatement. The restatement adjusts the historical numbers to reflect the correction of the error. This would consequently change the figures that were previously reported, including the net income for the periods affected.
The necessity to restate financials could stem from unintentional errors, such as mathematical mistakes or misapplication of accounting principles, or from intentional ones like fraud. When restating financials, comprehensive disclosure is required to inform stakeholders of the nature of the error, the periods affected, the impact on the financial data, and any relevant details necessary for a clear understanding of the correction.