Multiple Choice
The formula to compute the receivables turnover ratio is net credit sales divided by:
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7. Receivables and Investments
Net Accounts Receivable: Direct Write-off Method
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Under the direct write-off method, how does writing off an uncollectible account affect net accounts receivable on the balance sheet?
A
Net accounts receivable decreases by the amount written off.
B
Net accounts receivable increases by the amount written off.
C
Net accounts receivable is only affected at year-end adjustments.
D
Net accounts receivable remains unchanged.
Verified step by step guidance1
Understand the direct write-off method: This method involves directly removing the uncollectible account from accounts receivable and recording it as an expense when it is determined to be uncollectible. No allowance for doubtful accounts is used.
Identify the impact on accounts receivable: When an account is written off, the specific amount is subtracted from the accounts receivable balance, reducing the total accounts receivable.
Consider the net accounts receivable: Net accounts receivable is the total accounts receivable minus any adjustments (such as write-offs). Writing off an uncollectible account directly reduces the net accounts receivable by the amount written off.
Clarify timing: Under the direct write-off method, the adjustment occurs immediately when the account is deemed uncollectible, not at year-end adjustments.
Conclude the effect: Writing off an uncollectible account decreases net accounts receivable on the balance sheet by the amount written off.
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