exam 2 study guide - Allowance for doubtful accounts Reflects The volume of credit sales The firms customer base and past experience with customers The

exam 2 study guide - Allowance for doubtful accounts...

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Allowance for doubtful accounts: Reflects: The volume of credit sales The firm’s customer base and past experience with customers The firm’s credit policies and collection practices Economic conditions Underestimating bad debt expense will boost net income. Overestimating the allowance account can provide firms with an opportunity for a later correction that will ultimately boost net income. Cookie Jar Reserves Estimates vary, lots of bias Consistent relationship b/n the rate of change in sales, AR, and the allowance for doubtful accounts. clear explanations in notes if there are sig/abnormal changes to the accounts. Price vs Volume change If a company’s sales are changing, know if a result of price, volume, or both. In MD&A To relate changes in sales to the reasons for changes, use sales data from the income statement and the volume/price discussion in MD&A Real vs Nominal Growth Change in sales in nominal terms can be calc from IS An adjustment of the reported sales figure with CPI to make a comparison of the changes in real and nominal terms.

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