Financial Accounting and Reporting-CPA Practice Exam

What is required when presenting consolidated financial statements this year instead of individual company statements from last year?

1. A correction of an error

2. An accounting change that should be reported prospectively

3. An accounting change that should be reported by restating the financial statements of all prior periods presented

4. Not an accounting change

The correct answer is: An accounting change that should be reported by restating the financial statements of all prior periods presented

When a company decides to present consolidated financial statements this year instead of individual company statements from the prior year, this is regarded as a change in the reporting format. This type of change typically requires that the financial statements for all prior periods presented be restated. The reasoning behind this requirement lies in the need for consistency and comparability across financial periods. By restating prior financial statements, users of the financial statements can more effectively compare the financial position and performance across different periods, understanding trends and changes in operations more clearly. In this case, the choice to present consolidated statements is a fundamental change in how financial information is presented. Thus, it requires restating prior period financials to provide users with a clear view of the consolidated entity's financial health over time. This method ensures that stakeholders are not misled by shifts in accounting methods and can accurately evaluate the company’s performance. In contrast, the other options do not accurately reflect the nature of the change presented in the question. They do not align with the requirement for restating prior years' financial statements in the context of this significant alteration in reporting structure.