Identify at least two situations in which application of different accounting methods or accounting estimates results in problems comparing companies' financial information. Are there any examples from your workplace?
Answers
Answer:
Here you have your answer
Explanation:
Accounting estimates are used for various purposes in accounting, including:
Accounting estimates are used for various purposes in accounting, including:The useful life of property, plant, and equipment. This will influence.
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Answer:
The two examples are:
1.When one company follows cash basis as accounting method and the other company follows accrual basis.
2.Different depreciation methods by each company.
Explanation:
The fundamental principles and procedures that organisations use to maintain their financial records and produce their financial reports are referred to as accounting methods. The cash basis and the accrual basis are the two primary accounting techniques used for record-keeping.
Cash Basis:
According to current cash flow, income and costs are recorded in accounting records that are prepared on a cash basis. In contrast to when it is actually earned, income is reported when it is received, and costs are recorded when they are paid rather than when they are incurred. Therefore, using this accounting system, it is possible to postpone the receipt of taxable income by delaying billing such that it does not happen this year. Similar to income, expenses can be accelerated by paying them as soon as the bills are received, before the due date.
Accrual Basis:
Regardless of when the cash associated with those transactions actually changes hands, a business that uses the accrual basis for accounting recognizes both revenue and expenses at the time they are generated or incurred. This approach records income when it is earned rather than when it is paid out, and expenses when they are incurred rather than when they are paid out.
As we've seen, the main distinction between the two accounting techniques is to how each approach tracks the company's inflow and outflow of cash. Depending on the accounting method utilized to create the company's accounts at any one period, those accounts will appear very differently. Since all expenditures and income are finally documented, these differences gradually go smaller.
This is explained with an example below
It will display a rent expense of $12,000 in January and no rent expense for the remainder of the year if a company called, let's say, Cash Method Company, pays its annual rent of $12,000 in January rather than $1,000 each month all year. If a different company, Accrual Method Company, paid the same rent in January, its financial records would reflect a $1,000 rent charge for January as well as for the entire year. The cost reports for the two businesses will resemble one another quite a bit at the end of the year. Nevertheless, the two firm records will appear significantly differently at any point earlier in the year.
2nd Example explanation:
Let's say XLtd.. follows straight line depreciation and YLtd. follows diminishing balance method . Now while comparing the depreciation in two financial statements it becomes difficult to compare from 2nd year as one company provides depreciation on the initial cost of the asset i.e., follows straight line method of depreciation while the other company provides depreciation on reduced value of asset(Initial cost of asset - 1st year depreciation) i.e., follows diminishing balance method of depreciation.
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