Question

One limitation of financial information is the use of estimates in the financial statements.

Which of the following shows evidence of such estimates?
a) Balance sheet accuracy
b) Cash flow projections
c) Depreciation calculations
d) Historical cost reporting

Answer 1

Depreciation calculations illustrate the use of estimates in financial statements, as they require predicting the future utility of an asset.

Step-by-step explanation:

One limitation of financial information is the use of estimates in the financial statements. The option that shows evidence of such estimates is c) Depreciation calculations. Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life. Because it involves predicting the future utility of an asset, it is inherently an estimate. This contrasts with historical cost reporting, which is based on the original cost of the asset, rather than an estimate. Balance sheet accuracy and cash flow projections also involve estimates but to a lesser extent in day-to-day financial reporting when compared to systematic depreciation calculations.