Final answer:
If a material inventory error is discovered, the company should restate the financial statements for the affected periods. For non-material errors, corrections may be applied in the current period. Financial reporting standards and specific circumstances determine the approach to take.
Step-by-step explanation:
When a company discovers an inventory error two years after the error occurred, the correct approach to addressing this error depends on the significance of the mistake and the accounting standards being followed. In general, however, if the error is found to be material—meaning it could impact the decision-making of the users of the financial statements—the company should restate the financial statements for the affected periods.
When restating, the company should adjust the opening balances of the earliest period presented and apply changes to any other affected periods. The goal is to present the financial information as if the error had never occurred. If the error is not material, the company may choose to correct the error in the current period without restating prior periods.
It is important to note that financial reporting standards may vary between different jurisdictions and the specific circumstances of the error may require careful consideration by the company's accountants and auditors.