Multiple Choice
Which of the following statements regarding the allowance method for uncollectible accounts is FALSE?
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7. Receivables and Investments
Net Accounts Receivable: Allowance for Doubtful Accounts
Multiple Choice
Which method of estimating uncollectible accounts is generally considered more accurate for determining the Allowance for Doubtful Accounts?
A
Direct write-off method
B
Aging of accounts receivable method
C
Percentage of sales method
D
Cash basis method
Verified step by step guidance1
Understand the purpose of estimating uncollectible accounts: Businesses estimate uncollectible accounts to account for potential losses from customers who may not pay their debts. This ensures accurate financial reporting and compliance with the matching principle in accounting.
Review the methods provided: The problem lists four methods—Direct Write-Off Method, Aging of Accounts Receivable Method, Percentage of Sales Method, and Cash Basis Method. Each method has different applications and levels of accuracy.
Eliminate inappropriate methods: The Direct Write-Off Method does not estimate uncollectible accounts but instead records bad debts only when they are confirmed, violating the matching principle. The Cash Basis Method is not used for estimating uncollectible accounts as it recognizes revenue and expenses only when cash is exchanged.
Compare the remaining methods: The Percentage of Sales Method estimates uncollectible accounts based on a fixed percentage of total sales, which is less precise because it does not consider the age of individual receivables. The Aging of Accounts Receivable Method categorizes receivables by age and applies different percentages of uncollectibility to each category, making it more accurate.
Conclude the most accurate method: The Aging of Accounts Receivable Method is generally considered more accurate for determining the Allowance for Doubtful Accounts because it provides a detailed analysis of receivables based on their age and likelihood of collection.
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