Question

In financial accounting and rules of financial reporting:

1. What are estimates and assumptions?

2. Why is reporting them required?

3. What does this information tell you about a company?

Answer 1

In financial accounting and rules of financial reporting:-

1. Estimates:- An approximation in a financial statement of the amount to be credited or debited on items for which there is no precise means of measurement, such as depreciable assets or provisions for a loss from a lawsuit. Estimates are based on the judgment and specialized knowledge derived from past experience.

Assumptions:- There are four basic assumptions:-

• Accounting Entity – A corporation is considered a “living, fictional” being.
• Going Concern – A corporation is assumed to remain in existence indefinitely.
• Units of Measure of a company – Measurement and Financial statements show only measurable activities. Financial statements must be reported in the national monetary unit (i.e., U.S. dollars for U.S. companies).
• Periodicity – A company’s continuous life can be divided into measured periods of time for which financial statements are prepared. U.S. companies are required to file quarterly and annual reports.

2. Why is reporting of assumptios and estimates required?

• Assumptions and estimates affects the amounts and the reporting of the recognized assets and debts, income and expenses, and contingent liabilities.
• These assumptions and estimates comply with the conditions and appraisals prevailing on the balance sheet date
• They also impact the amount of income and expenses reported on for the fiscal years in question.
• So, reporting of assumptions and estimates required by GAAP.

3. What does this information tell you about a company?

Assumptions and estimates tell us about company's a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial period, as Estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.