Essay on Accounting Analysis : Accounting And Accounting

997 Words Dec 2nd, 2016 4 Pages
Accounting calls for the use of estimates in the preparation of the required financial statements. Estimates in this case relate to the use of precise amounts in financial statement elements that cannot be precisely determined. Therefore the amounts are subjective and lack precision because they are plagued by the use of subjective management foresight to determine the values utilized in the financial reports. Where the use of estimates is encouraged there is definitely a lack of accuracy and reliability of the financial information provided (Lev 2016). Some of the typical examples (Table I) of accounting estimates include valuation of securities, obsolete inventory, impairment costs attributed to noncurrent assets and the useful lives of noncurrent assets. Others are annual effective tax rate in interim reporting, benefitting pension liabilities, slow moving and obsolete inventory, and losses and net realizable value on disposal of segment or restructuring of a business.
There is no doubt that constant review and revision of the estimates of assets and liabilities impacts the relevancy of the accounting information (Hodder 2013). There is a broad range of factors that creditors and investors analyze before approving loans or investing in a company. One of the crucial elements that is sought out by these two stakeholders is the profitability of the enterprise. Accounting estimates impact the resulting profitability of a company because they can alter the income…

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