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

Net Accounts Receivable: Direct Write-off Method

Financial Accounting

7. Receivables and Investments

Net Accounts Receivable: Direct Write-off Method

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Multiple Choice

Which of the following best describes how the direct write-off method affects net accounts receivable on the balance sheet?

Bad debts are written off only when they are determined to be uncollectible, reducing accounts receivable and net accounts receivable at that time.

Bad debts are written off at the end of each month regardless of payment history.

Bad debts are never recognized, so net accounts receivable is always equal to total accounts receivable.

Bad debts are estimated and recorded as an allowance, reducing net accounts receivable immediately.

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Verified step by step guidance

Step 1: Understand the direct write-off method. This method involves recognizing bad debts only when they are determined to be uncollectible, rather than estimating them in advance.

Step 2: Analyze how the direct write-off method impacts accounts receivable. When a bad debt is identified, the specific amount is removed from accounts receivable, reducing the total accounts receivable balance.

Step 3: Consider the timing of the adjustment. Since bad debts are written off only when they are confirmed as uncollectible, the reduction in accounts receivable and net accounts receivable occurs at that specific time.

Step 4: Compare this method to other approaches, such as the allowance method. Unlike the direct write-off method, the allowance method estimates bad debts in advance and records them as an allowance, reducing net accounts receivable immediately.

Step 5: Evaluate the options provided in the problem. The correct description aligns with the direct write-off method, where bad debts are written off only when determined uncollectible, impacting accounts receivable and net accounts receivable at that time.