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PDtax, Master's Degree
Category: Business and Finance Homework
Satisfied Customers: 4622
Experience:  MBA/CPA, Former college instructor and tutor.
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Adjusting entries made by companies each often involves

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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? I need this completed asap. Will provide a bonus incentive.
Submitted: 3 years ago.
Category: Business and Finance Homework
Expert:  PDtax replied 3 years ago.

PDtax :

Welcome to the site. I'm PDtax, and will be helping you today.

PDtax :

to Q & A for response...

Customer: replied 3 years ago.
I need an answer or a solution prior to submitting an acceptance fee. Thanks!!
Expert:  PDtax replied 3 years ago.
Hi Miles,

Estimates have been used for financial statements since there have been financial statements. The bias of the statements and their use requires estimates regarding many of the figures reported on financials. The accounting profession has responded to manipulation of financial information, but opportunities to use estimates to manipulate still exist, even today.

Financials have a historical bias; that is, they start out by reporting historical transactions. Those transactions are then manipulated to reflect accounting principles such as revenue recognition (when is income income), depreciation (the building should last XX years), bad debts expense (we expect 3% of our receivables that are 60 days old to become uncollectible) and more. Note these all require contemplation of future income or expenses. The methods used are generally based on history, but can be manipulated.

Accounting rules require estimates to be reasonably based on facts or history, such as bad debt expense. Issuers of financials have long been manipulating their statements for their benefit, and the accounting profession has responded to these issues over time to try and control the manipulation opportunities.

The use of estimates does provide an opportunity to manipulate financial reporting. The profession allows for tests of materiality (does this omission or estimate mislead the reader about the financials taken as a whole?) and specific methodologies for transfer pricing, sales/income recognition, accruals of expenses due next year or beyond, inventory valuations, etc.

To summarize, the opportunities for manipulation remain, but there are controls that apply to each of the items and methods mentioned.

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