Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Types of Receivables

Financial Accounting

7. Receivables and Investments

Types of Receivables

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Multiple Choice

If an aging analysis estimates that 5\% of year-end accounts receivable are uncollectible, which method of accounting for bad debts is being used?

Direct write-off method

Percentage of sales method

Allowance method based on the income statement approach

Allowance method based on the balance sheet approach

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Verified step by step guidance

Understand the concept of the allowance method: This method involves estimating uncollectible accounts and recording them as an expense in the same period as the related revenue. It ensures compliance with the matching principle in accounting.

Identify the balance sheet approach: The balance sheet approach focuses on estimating uncollectible accounts based on the accounts receivable balance at the end of the period, often using an aging analysis.

Recognize the role of aging analysis: Aging analysis categorizes accounts receivable based on the length of time they have been outstanding. It applies a percentage (e.g., 5%) to each category to estimate the uncollectible amount.

Compare methods: The direct write-off method records bad debts only when they are confirmed uncollectible, violating the matching principle. The percentage of sales method estimates bad debts based on sales, which is an income statement approach. The allowance method based on the balance sheet approach uses aging analysis to estimate uncollectible accounts, aligning with the problem's description.

Conclude that the method described in the problem is the allowance method based on the balance sheet approach, as it uses aging analysis to estimate uncollectible accounts.