Hummel Inc. and Nadia Co. have experienced identical economic performances for the last several years of growing sales. Each uses identical accounting measurement rules except that Hummel uses the allowance method and Nadia uses the direct write-off method of accounting for bad debts. Both companies have experienced a gradual increase in uncollectible accounts. Which one of the following statements is true in the first year of operations for both companies?

Question

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In the first year of operations, Hummel's net income is less than Nadia's because the allowance method records an estimate of bad debts as an expense, reducing net income, while the direct write-off method does not recognize bad debts until they are specifically identified, which may not occur in the first year.