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Unformatted text preview: Financial Accounting: A Business Perspective 9e 264 9 RECEIVABLES AND PAYABLES ANSWERS TO QUESTIONS 1. To do so would be to change to a cash basis of accounting for revenues. Accountants have long argued that the accrual basis more accurately depicts the underlying economic activity that they seek to measure and report on. Most accountants would argue that waiting until specific accounts are written off to give recognition to the effect upon net income of uncollectible accounts could place the charge in the wrong year. Uncollectible accounts should be charged to the year in which the sale was made. Such a delay in recognition would also result in an overstatement of accounts receivable in the balance sheet. 2. Establishing this policy probably would not be a profitable move. To attain such a goal, a company would have to sell for cash or only to a few select customers, such as the U.S. government. Such a move may cut sales substantially. The incremental income on this reduction may be far greater than the cost of any credit losses arising from making these sales. 3. The two purposes are to: (a) match uncollectible accounts against the revenues that give rise to them and (b) present the accounts receivable in the balance sheet at their net realizable value. 4. After a company has been on the allowance method of accounting for uncollectible accounts for a few years, the balance in the allowance account consists of the net amount of inadequate or excessive estimates of possible uncollectible accounts for all of the years that the allowance account has been employed. 5. The balance in the allowance for uncollectible accounts must be considered before adjustments are made under the percentage of receivables method. 6. When compared with an aging schedule prepared for a prior period, the current aging schedule might show that customers are tending to change their payment practices and that receivables are outstanding for longer periods of time. This could alert management to the fact that larger amounts of capital are needed to finance the receivables, or it could induce management to take action to counter the trend. The aging schedule is also helpful in identifying uncollectible accounts. 7. Because Uncollectible Accounts Expense is debited, only the establishment of the allow- ance account has a direct effect upon net income. Write-offs of uncollectible accounts and recoveries of accounts previously written off have no direct effect on net income because there is no debit or credit to Uncollectible Accounts Expense. Recoveries may indirectly affect net income for a given year if the size of the current year's expense is determined after giving consideration to the amount in the allowance account before adjustment....
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