Multiple Choice
Which of the following is considered a poor reason for a company to extend credit to its customers?
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7. Receivables and Investments
Types of Receivables
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7. Which statement is true about Lillie’s past due account(s)?
A
Past due accounts are always written off immediately as bad debts.
B
Past due accounts are considered cash equivalents on the balance sheet.
C
Past due accounts are typically classified as accounts receivable and may require an allowance for doubtful accounts.
D
Past due accounts are not reported on the financial statements.
Verified step by step guidance1
Understand the concept of past due accounts: These are accounts receivable that have not been paid by the customer within the agreed-upon payment terms.
Review the treatment of past due accounts in financial accounting: Past due accounts are typically classified as accounts receivable on the balance sheet, but they may require an allowance for doubtful accounts to account for the risk of non-payment.
Clarify why past due accounts are not written off immediately as bad debts: Writing off an account as a bad debt occurs only when it is determined that the account is uncollectible, not simply because it is past due.
Explain why past due accounts are not considered cash equivalents: Cash equivalents are highly liquid investments with a maturity of three months or less, whereas past due accounts are receivables and not liquid assets.
Highlight the importance of reporting past due accounts on financial statements: They are included in accounts receivable, but an allowance for doubtful accounts may be used to adjust the value of receivables to reflect potential losses.
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