Final answer:
Errors in prior period financial statements should be corrected by adjusting the opening balance of retained earnings, reflecting this change in the current period's financial reports, and not in the income statement, to ensure accurate financial representation.
Step-by-step explanation:
The correction of an error in the financial statements of a prior period should be reported as an adjustment of the opening balance of retained earnings, net of applicable income taxes. According to accounting standards, these types of adjustments are to be recognized in the period in which the error is discovered. The correction is not reported in the income statement because it pertains to a prior period and does not reflect current period earnings activities.
The appropriate action is to report prior period errors by restating the comparative financial statements unless it is impracticable to determine the effects of the error for specific prior periods. In such a case, the cumulative effect of the error is adjusted against the opening balance of retained earnings of the earliest period presented. This ensures that the financial statements present a true and fair view of the company's financial position and performance for all periods presented.