Cumlative effect of a change in accounting principle: Remove it from the income statement

Of the two basic approaches to income measurement, the allinclusive approach has generally been recognized as more useful to fin cial statement users than the current operating performance approach. The all-incur live approach requires that all income items flow through the income statement before being closed to retained earnings. In recent years, however, FASB has promulgated several exceptions to the allinclusive approach, allowing the income effects of certain transactions to be reported directly in owner's equity.

To bring greater awareness to these bypass items and to aid financial statement users in assessing a firm's activities and the timing and amounts of a firm's future cash flows, SFAS 130 requires firms to disclose comprehensive income. Comprehensive income consists of traditional net income and the bypass items, called "other comprehensive income."

Although firms are expected to apply accounting principles consistently, a firm is allowed to change an accounting principle when justified by economic conditions. When a change in principle is made, the cumulative effect is disclosed on the income statement for most changes, although it is a paper entry with no impact on cash flows or current operating activities. Moreover, some accounting changes are reflected on the income statement, while others are report ed in the retained earnings statement.