The functional abilities of 319 elderly individuals with dementia were assessed using an objective, performance-based measure (the Direct Assessment of Functional Abilities) and caregiver’s report (through the Assessment of Daily Activities and Dementia Severity Rating Scale). The association between the objective measure and caregiver report was examined. Logistic regression analyses demonstrated that caregivers’ reports of instrumental activities of daily living and basic activities of daily living were significantly associated with an objective measure of these functional abilities. Additionally, potential moderating variables were examined. None of the caregiver variables of gender, age, education level, caregiver-care recipient relation, prior and current relationship closeness, and frequency of contact were significant moderators of the association between caregiver report and the objective measure. Caregiver depression, anxiety, emotional status, and distress did not moderate this association. Additionally, none of the care recipient variables of cognitive status, depression, psychiatric symptoms, or dementia duration moderated the association between caregivers’ reports and the objective measure; however, the care recipients’ sensory motor impairments (hand, vision, or hearing impairments) significantly moderated the association between the objective measure and caregiver reports on one measure of functional ability. That is, when the caregiver report indicated mild/moderate functional impairment, the care recipient was 6.52 times as likely to be classified in the more severe group on the objective measure when sensory motor impairments were severe (p < 0.02), whereas the caregiver report and the objective measure were not associated for those care recipients whose caregiver report score indicated severe impairment when sensory motor impairments were mild/moderate (p = 0.24). These results provide some support for the use of proxy reports of functional abilities, with caution advised when the care recipient displays sensory motor impairments.