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

When is it acceptable to use the direct write-off method for uncollectible accounts?

When a company wants to maximize net income

When uncollectible accounts are immaterial in amount

When accounts receivable are always material

When generally accepted accounting principles (GAAP) require it for all companies

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Verified step by step guidance

Understand the context of the question: The direct write-off method is one of the two primary methods used to account for uncollectible accounts, the other being the allowance method. The direct write-off method records bad debt expense only when a specific account is deemed uncollectible.

Recall the key limitation of the direct write-off method: It does not comply with the matching principle under GAAP because it does not match bad debt expense to the same period in which the related revenue was earned.

Identify the exception: GAAP allows the use of the direct write-off method only when the uncollectible accounts are immaterial in amount. This is because the impact on financial statements is negligible, and the simplicity of the method outweighs the need for strict adherence to the matching principle.

Evaluate the options provided: Eliminate options that are incorrect, such as 'When a company wants to maximize net income' (this is not a valid reason under GAAP), 'When accounts receivable are always material' (this would require the allowance method), and 'When GAAP requires it for all companies' (GAAP does not mandate the direct write-off method for all companies).

Conclude that the correct answer is: 'When uncollectible accounts are immaterial in amount,' as this aligns with the exception allowed under GAAP for the direct write-off method.