Lore Co. changed from the cash basis of accounting to the accrual basis of accounting during 1994. The cumulative effect of this change should be…

Choice "a" 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 "b" 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 "c" and "d" are incorrect. Correction of prior period errors has no effect on the current year's

income statement.