Question

Which of the following is NOT true regarding the correction of an error?

a) A journal entry is made to correct any account balances that are incorrect as a result of the error
b) Prior years' financial statements are restated to reflect the correction of the error (if the error affected those statements)
c) The correction is reported prospectively; previous financial statements are not revised
d) A disclosure note should describe the nature of the error and the impact of its correction on each financial statement line item and any per-share amounts affected for each prior period presented.

Answer 1

The incorrect statement about the correction of an error in financial statements is that corrections are reported prospectively without revising previous financial statements, as prior statements are typically restated to correct errors.

Step-by-step explanation:

The statement that is NOT true regarding the correction of an error is: c) The correction is reported prospectively; previous financial statements are not revised. When an error is discovered in the financial statements, a journal entry is made to correct the account balances. If prior years' financial statements were affected, they are usually restated, unless the effect is deemed to be immaterial. Restating financial statements ensure that they present a true and fair view of the company's financial performance and position.

A disclosure note must also explain the nature of the error and the impact of its correction on the relevant financial statement line items, including any per-share amounts for each period presented. Companies follow these procedures to maintain transparency and comply with accounting principles and regulations.