Question

1. Financial statements rely on countless estimates by accountants, including the useful life of buildings and equipment, the dollar amounts that will be collected from customers who purchase on credit, the prediction of future costs related to warranty claims or future pension obligations.

Required:

Prepare a short argument to explain why estimates are an acceptable and important ingredient in the preparation of financial statements.

Answer 1

Accounting deals with various estimates relating to the future events that is highly uncertain. Hence, here comes the need to have estimated and approximate figures. Accounting estimates are often included in financial statements as :-

1. Valuation of some accounts is uncertain that is dependent on future events. Hence, data is taken as estimates.

2. Books of Accounts are in historical nature as guided by cost concepts, conventions etc. Hence, if the present status of an asset or liability is calculated then will go on estimates.

3. There are some contingent accounts example pending lawsuits, future bad debt expense etc. Hence, represented in financial statements by estimates.

Allover, financial statements are made to ensure the user with the best information relating to the past, present and future happenings. Hence, estimates are an acceptable and important ingredient in the preparation of financial statements.