Final answer:
The cumulative effect of a change in accounting principle when presenting comparative financial statements is to adjust all prior periods as if the new principle had always been in use, including adjusting the opening retained earnings balance of the earliest period provided.
Step-by-step explanation:
When comparative financial statements (FS) are presented, the cumulative effect of a change in accounting principle is applied retrospectively unless it is impracticable to determine the cumulative effect of applying the new accounting principle. This means that all prior periods presented in the comparative financial statements should be adjusted as if the new accounting principle had always been in use. An adjustment should be made to the opening balance of retained earnings for the earliest period presented, net of any tax effects. This reflects the cumulative effect of the change on periods prior to those presented.
For example, if a company decides to switch from using the last-in, first-out (LIFO) inventory method to the first-in, first-out (FIFO) method, it must restate prior period financial statements as if FIFO had always been used. The differences in inventory valuation and cost of goods sold in those prior periods would be adjusted, which would ultimately change net income and retained earnings for those periods.