Final answer:
Prior period adjustments are corrections of significant errors in previous financial statements. They affect decisions of stakeholders and are disclosed in current period statements.
Step-by-step explanation:
Regarding the question of whether a certain item should be reported as a prior period adjustment, it is essential to understand what constitutes such an adjustment. Prior period adjustments are corrections of errors in financial statements that are not discovered until after those statements have been issued. These adjustments are included in the current period's statements but relate to prior periods.
Typically, errors that are found that would significantly affect the understanding of the financial reports of prior periods warrant prior period adjustments. These include mathematical mistakes, mistakes in applying accounting principles, or oversight of facts that existed at the time the financial statements were prepared.
The decision to make a prior period adjustment is based on whether the error is material enough to affect decisions of those relying on the financial statements. If the error is immaterial, it may be corrected in the current period without the need for a prior period adjustment.