1. What is an example of a significant accounting estimate? What is the importance of these estimates? How do ethics play into the decision-making process? Which financial statements include significant accounting estimates? Why?
2. What are internal controls? Why do companies need them? What are some examples of internal controls? Who is responsible for developing internal controls? Why?
An example of a significant accounting estimate is the provision for liabilities and charges. A firm receives several legal claims from different jurisdictions. The management makes an estimate of the likelihood of these claims succeeding. Some other examples are the estimates of goodwill impairment, and fair value of financial instruments.
The importance of these estimates is that these affect the income/loss of the firm in a significant way. For example, if too large a provision is created, the profits of the firm goes down. Also, if the provisions are too low the current profits get inflated.
Ethics play an important role in these estimates. If the current income of the firm is lower than market expectations, the management ...
This solution explains significant accounting estimate. The sources used are also included in the solution.