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: Aging of Receivables Method

Financial Accounting

7. Receivables and Investments

Net Accounts Receivable: Aging of Receivables Method

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Multiple Choice

For accounts receivable, the longer an account is outstanding, which of the following is generally true according to the aging of receivables method?

The likelihood of collection decreases.

No allowance for doubtful accounts is needed.

The likelihood of collection increases.

The account is written off immediately.

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Verified step by step guidance

Understand the concept of the aging of receivables method: This method categorizes accounts receivable based on the length of time they have been outstanding. It is used to estimate the likelihood of collection and the allowance for doubtful accounts.

Recognize the relationship between the age of receivables and collection likelihood: Generally, the longer an account is outstanding, the less likely it is to be collected. This is a key principle in the aging of receivables method.

Consider the role of the allowance for doubtful accounts: The aging method helps businesses estimate the amount of uncollectible accounts and adjust the allowance for doubtful accounts accordingly. This ensures accurate financial reporting.

Evaluate the incorrect options: 'No allowance for doubtful accounts is needed' contradicts the purpose of the aging method. 'The likelihood of collection increases' is incorrect because older accounts are harder to collect. 'The account is written off immediately' is not true, as accounts are typically written off only after all collection efforts fail.

Conclude that the correct answer is: 'The likelihood of collection decreases,' as this aligns with the principle that older accounts are less likely to be collected.