Management uses the ageing approach method to calculate the allowance for doubtful debts. An analysis of the ageing of accounts receivable shows a substantial increase in the accounts receivable in the over-90-days category. Management does not adjust the allowance for doubtful debts at year-end. As a result:
A) assets are overstated, and net income is overstated.
B) assets are overstated, and net income is understated.
C) assets are understated, and net income is overstated.
D) assets are understated, and net income is understated.

Question

Quizplus · Accepted Answer

The ageing of accounts receivable indicates that a significant number of accounts are overdue and may not be collected. By not adjusting the allowance for doubtful debts, the company is overstating its assets (accounts receivable) on the balance sheet because it is assuming that all of the overdue accounts will eventually be collected. Additionally, since the allowance for doubtful debts is not being increased, the net income will also be overstated because bad debts expense is not being properly recognized.

Management Uses the Ageing Approach Method to Calculate the Allowance