Foothill Construction uses the allowance method for bad debts.If management is overly pessimistic about its ability to collect customer accounts,the company will overstate Bad Debt Expense and:
A)understate net income and days to collect will increase.
B)understate net income but days to collect will decline.
C)overstate net income and days to collect will increase.
D)overstate net income and days to collect will decline.

Question

Quizplus · Accepted Answer

If Bad Debt Expense is overstated,then net income will be understated.The days to collect ratio measures the average number of days from sale on account to collection.If the company is overly pessimistic about its ability to collect,it follows that the number of days to collect will decrease (since it will take shorter than expected to collect receivables).

Foothill Construction Uses the Allowance Method for Bad Debts