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    The Use of Estimates in Financial Reporting

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    Discussion 1

    Adjusting entries made by companies each period often involves the use of estimates. Examples would include calculating depreciation of long-lived assets, determining the amount of accounts receivable that are uncollectible, or estimating the impairment of assets that are no longer worth the amount paid for them.

    How does the use of estimates affect the financial statements of a company?

    In your opinion, does the use of estimates create opportunities for companies to manipulate financial reporting?

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    Solution Preview

    Estimates directly affect the balance sheet and income statement because they affect the values of assets and liabilities as well as revenues and expenses. For example, a depreciation estimate affects the net book values of fixed assets as well as depreciation expense, a warranty liability estimate affects warranty liability and warranty expense, and an estimate of revenue earned from a customer advance affects the ...

    Solution Summary

    This solution discusses the effects of using estimates on the financial statements and whether management can manipulate financial reporting by using estimates.

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