Lore Co. changed from the cash basis of accounting to the accrual basis of accounting during the current year. The cumulative effect of this change should be reported in Lore's current year financial statements as a:
a. Component of income from continuing operations.
b. Prior period adjustment resulting from the correction of an error.
c. Component of income from continuing operations, net of tax.
d. Prior period adjustment resulting from the change in accounting principle.
Choice "b" is correct. The cash basis for financial reporting is not a generally accepted accounting basis of accounting (GAAP); therefore, it is an error. Correction of an error from a prior period is a reported as prior period adjustment to retained earnings.
Choice "d" is incorrect. Cash basis reporting is not an accounting principle under accrual accounting principles. Thus, the change from cash basis is not reported as a change in accounting principle. In addition, changes in accounting principle are not prior period adjustments; instead, they are treated retrospectively.
Choices "a" and "c" are incorrect. Correction of prior period errors has no effect on the current year's income statement.