Multiple Choice
Which of the following is a true statement about a company that uses the allowance method for accounting for doubtful accounts?
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7. Receivables and Investments
Net Accounts Receivable: Allowance for Doubtful Accounts
Multiple Choice
Which of the following best describes the cash net realizable value of accounts receivable on the balance sheet?
A
Accounts Receivable plus Allowance for Doubtful Accounts
B
Accounts Receivable minus Allowance for Doubtful Accounts
C
Accounts Receivable minus Bad Debt Expense
D
Accounts Receivable plus Bad Debt Expense
Verified step by step guidance1
Understand the concept of net realizable value (NRV): In financial accounting, the net realizable value of accounts receivable represents the amount of cash expected to be collected from customers after accounting for potential uncollectible amounts.
Identify the role of the Allowance for Doubtful Accounts: This is a contra-asset account that reduces the total accounts receivable to reflect the estimated uncollectible amounts. It is used to calculate the NRV.
Recognize the formula for NRV: The cash net realizable value of accounts receivable is calculated as Accounts Receivable minus Allowance for Doubtful Accounts. This adjustment ensures the balance sheet reflects the realistic collectible amount.
Clarify why Bad Debt Expense is not included: Bad Debt Expense is an income statement account that records the estimated uncollectible accounts for a specific period. It does not directly affect the calculation of NRV on the balance sheet.
Apply the correct formula: To determine the cash net realizable value of accounts receivable, subtract the Allowance for Doubtful Accounts from the total Accounts Receivable. This ensures the balance sheet reflects the expected cash inflow from receivables.
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