Final answer:
Changes in accounting estimates are adjustments to asset or liability amounts due to new information or developments, impacting the financial state and fiscal policy. Examples include depreciation method changes, allowance for doubtful accounts, and revisions to pension plan obligations.
Step-by-step explanation:
Changes in accounting estimates are adjustments made to the carrying amount of assets or liabilities. They are necessary because of new information or developments and are made before the balance sheet date. Accounting estimates are an essential part of financial reporting and can change due to various factors. Here are six common examples of changes in accounting estimates:
- Depreciation methods, rates, or useful lives of assets
- Allowance for doubtful accounts related to potential credit losses
- Estimates of inventory obsolescence
- Changes in warranty obligations or the costs to fulfill them
- Revisions to pension plan obligations due to changes in actuarial assumptions
- Estimation of potential liabilities or asset write-downs due to litigation outcomes
These changes can markedly impact a company's financial state and fiscal policy, as they may significantly alter the reported earnings and asset values. Effective management and recognition of these estimates are vital for accurate financial reporting and planning.