Final answer:
Prior period adjustments in financial statements are generally the result of unacceptable accounting practices, such as errors in the application of accounting principles or mistakes in previously issued financial reports. They correct past errors and are not associated with normal changes in estimates, tax laws, discontinued operations, or extraordinary items.
Step-by-step explanation:
Prior period adjustments to financial statements result from unacceptable accounting practices. These adjustments are corrections of errors in the financial statements of prior periods when such errors are discovered. Errors can arise from mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time the financial statements were prepared.
Adjustments for changes in accounting estimates, such as depreciation rates or bad debt allowances, are accounted for in the current and future periods, not as prior period adjustments. These are not corrections of errors but rather normal revisions based on new information or circumstances affecting the estimate. Conversely, unacceptable accounting practices, such as improper revenue recognition, could lead to errors requiring correction via prior period adjustments.
Discontinued operations and extraordinary items are reported in the periods in which they occur. Changes in tax law also typically affect current and future periods' financial statements, and do not trigger prior period adjustments. Therefore, these items are not typically adjusted retrospectively in financial statements unless they have been previously misreported due to an error.