ACCA Audit and Assurance (F8) Practice Exam

What type of figure is typically considered an estimate in financial statements?

1. Cash reserves

2. Accrued revenue

3. Fixed assets

4. Capital stock

The correct answer is: Accrued revenue

Accrued revenue is typically considered an estimate in financial statements because it involves recognizing revenue that has been earned but not yet received in cash. The estimation is necessary because it requires management to make judgments regarding the timing and amounts of revenue to be recognized based on anticipated performance and service completion. This concept is rooted in the accrual basis of accounting, where revenue is recorded when it is earned, regardless of when the payment is received. As a result, the amount of accrued revenue can vary depending on numerous factors, including sales forecasts, customer contract terms, and the estimated probability of collection. In contrast, cash reserves are recorded based on actual cash balances and do not involve estimation. Fixed assets are valued based on historical costs and any depreciation or impairment but do not inherently require estimation of their value in financial statements. Likewise, capital stock is issued at par value or consideration received and is not subject to estimation, as it reflects a factual transaction that has taken place. Thus, accrued revenue is distinct in that it requires management judgment and estimation, aligning it with the definition of an estimate in financial reporting.