Chapter I 1. Introduction 1.

1 Brief Background of the Study Deciding to incur a prior period adjustment implies severe complications towards the stability of the company. Those prior period adjustments are based on the prepared financial statements. Financial Statements are the record of the financial activities of business, person or an entity. Financial Statements are prepared after the adjusting entries have made or entered into a worksheet. There are several reasons why a certain company uses financial statements. First of all, they wanted to see the financial performance of their company whether it is good or not. With this, they can actually think of the best way on how they can improve the condition and performance of their company. Second, they are in line with the GAAP (Generally Accepted Accounting Principles) that helps a certain company to see on how their management had reached their stability. Lastly, these Financial Statements are of big help for the accountants to easily locate the errors they have made in the past transactions. And with these, a prior period adjustment has to be made. Prior Period Adjustment is the correction of an error in the financial statements on a prior period. A Prior Period Adjustment is needed to be done so that accountants can change or correct the error they made on a specific period of time. It is important to do this prior period adjustment so that a companys financial condition would not be overstated nor understated. 1.2 The Statement of the Problem For an instance, most companies use either of the two kinds of approaches in manipulating financial statements. First, is to inflate current period earnings on the income statement by artificially inflating revenue and gains or by deflating current period expenses. Second, it requires the exact opposite strategy, which is to deflate current period earnings on the income statement by inflating current period expenses or by deflating revenue. However, these two approaches are more likely to have corresponding advantages as well as

disadvantages that lead the company into trouble. And, here prior period adjustment takes place. In conducting prior period adjustments, many things are to be considered. Many accounts are to be recorded and written off. In this case, these accounts to be written off and to be adjusted are the frequent mistakes being made by many, so these cause the preparation of financial statements disturbed by various errors. As a result, these errors also lead to incorrect representation of the needed financial statements. Failing to record or improperly reducing liabilities are the often mistakes in recording the transactions, thus, resulting to overstatement or even understatement of the equity accounts. It can be reported to the government and be under investigation wherein many things will be affected. Therefore, is reporting prior period errors and incurring PPA could be of help in a company or a hindrance to companys stability?

1.3 The Importance of the Study Industries within different fields shall apply necessary changes about their accounting systems and policies under the agreement of all the liable members of their organization, specifically, at the time when there is a sudden error in presenting their prior period financial statement. With this, this study helps the companies to observe the changes they are going to incur, and make them knowledgeable of the corresponding difficulties of the decision they have to withstand. It also informs that these changes that have to be made must comply with the terms and condition of the International Financial Reporting Standards (IFRS). Because at this point of time, an entitys management encounters different transactions and events which hold ambiguous cases, therefore, the concerned management needs to follow various requirements in IFRS because if not, the effect of doing so would not be material, referring to the Materiality Threshold Quality which is significant in the attainment of better image and stability of any company.

In addition, not only the liable members of the company will be affected if the said changes would not be governed well. The employees in it will also experience troubles about their assurance of how long they will be retained employed, earn money for their daily needs and the benefits given to them at the time they have been working for the company. Also, it can also affect the status of the economy of the whole nation as being compared with those other foreign countries. Thus, this study is of great help in assessing ones limitations even among different aspects.

1.4 Scope and Delimitations of the Study This research study emphasized prior period adjustments and the effects of this on a companys accounting system and stability. The respondents of our research were Certified Public Accountants (CPAs) and the businessmen living or working here in Bulacan. Gender, age, CPAs employer and year of work experience or business life did not limit our study. This research was only for school purposes and will not be use by any outside party. This research study was conducted from January to March 2012. Definitions of Terms Used: In order to clarify the words being used in this research study, here are their corresponding meanings: Accountant -one that keeps, audits, and inspects the financial records of individuals or business concerns and prepares financial and tax reports. Ambiguous open to or having several possible meanings or interpretations; equivocal:

Certified Public Accountant an accountant certified by a state examining board as having fulfilled the requirements of state law to be a public accountant. Knowledgeable possessing or exhibiting knowledge, insight, or understanding. Liable -legally responsible Stability -the state or quality of being stable.