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: Percentage of Sales Method

Financial Accounting

7. Receivables and Investments

Net Accounts Receivable: Percentage of Sales Method

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Multiple Choice

The income statement approach for estimating bad debts uses a percentage of which of the following?

Accounts receivable balance

Net credit sales

Gross profit

Total assets

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Verified step by step guidance

Understand the concept: The income statement approach for estimating bad debts focuses on using a percentage of net credit sales to estimate the amount of uncollectible accounts. This method is based on the idea that a certain percentage of sales made on credit will not be collected.

Step 1: Identify the relevant financial metric. In this case, the approach uses 'Net Credit Sales' as the basis for estimating bad debts. Net credit sales represent the total sales made on credit minus any returns or allowances.

Step 2: Determine the percentage to apply. This percentage is typically based on historical data or industry standards, reflecting the average rate of uncollectible accounts for the company.

Step 3: Apply the percentage to net credit sales. Multiply the net credit sales by the predetermined percentage to calculate the estimated bad debts. For example, if net credit sales are $100,000 and the percentage is 2%, the estimated bad debts would be $100,000 × 0.02.

Step 4: Record the estimated bad debts. Create a journal entry to record the bad debt expense and increase the allowance for doubtful accounts. The entry would typically debit 'Bad Debt Expense' and credit 'Allowance for Doubtful Accounts'.