Question 1

Generally accepted accounting procedures allow companies to choose to use either the "direct write-off" or "allowance" methods of accounting for bad debts, regardless of how material the bad debt expense is.

Accepted Answer

The direct write-off method is generally not accepted under Generally Accepted Accounting Principles (GAAP) for material amounts because it does not match expenses with revenues in the period in which they are incurred. The allowance method is preferred as it better adheres to the matching principle by estimating and matching bad debt expense to the period the revenues were earned.

Question 2

The method of accounting for bad debts that recognizes an estimated expense in the period of the related sales, before the company knows which specific customers' are not going to pay, is the "allowance method."

Accepted Answer

The allowance method is the method of accounting for bad debts that recognizes an estimated expense in the period of the related sales, before the company knows which specific customers' are not going to pay.

Question 3

A major advantage of the "direct write-off method" over the allowance method of accounting for bad debts is better matching of revenues and expenses.

Accepted Answer

The direct write-off method does not match revenues and expenses as it only recognizes bad debts when they occur. The allowance method, on the other hand, estimates and matches the anticipated bad debts with revenues in the same accounting period.

Question 4

A major advantage of the "direct write-off method" over the allowance method of accounting for bad debts is simplicity.

Accepted Answer

The direct write-off method only requires companies to record bad debts as they occur, while the allowance method requires more complex calculations and estimates for setting aside a reserve for future bad debts.

Question 5

Compared to the allowance method of accounting for bad debts, the direct write-off method requires companies to do more estimation.

Accepted Answer

The direct write-off method does not require estimation as bad debts are only recorded when they are actually identified as uncollectible. In contrast, the allowance method estimates bad debts based on past experience and current economic conditions.

Question 6

Under GAAP, companies should report both the amount receivable from customers and an allowance for doubtful accounts.

Accepted Answer

Under GAAP (Generally Accepted Accounting Principles), companies should report both the amount receivable from customers and an allowance for doubtful accounts to accurately reflect the estimated amount of uncollectible accounts receivable. This is required to ensure that financial statements are presented fairly and accurately.

Question 7

If a company does not know at the end of a year exactly how much of its accounts receivable will not be collected, it is not allowed under GAAP to estimate the bad debt expense.

Accepted Answer

Under GAAP, companies are required to estimate the bad debt expense at the end of the year, based on historical trends and current economic conditions. This estimation process is necessary to accurately reflect the value of accounts receivable on the company's financial statements.

Question 8

When a company uses the allowance method of accounting for bad debts, its reported expense in any year is affected both by the events of that year, and also by over- or underestimates of bad debts in the previous year.

Accepted Answer

When using the allowance method, the company must estimate the amount of bad debts that will occur in the future, which can result in overestimating or underestimating bad debts from previous years. This can impact the reported expense for the current year.

Question 9

In 2016, when the Lee Company learned that its estimate of bad debt expense in 2014 was 5% too high, the accounting rules required it to go back and change the 2014 financial reports.

Accepted Answer

Accounting principles generally require that errors discovered in a subsequent period be corrected in the period they are discovered, rather than by amending previously issued financial statements. The correction is typically reflected in the current period's financial statements.

Question 10

In general, if a company makes an incorrect estimate of bad debt expense one year, this incorrect estimate will not affect any future years' income.

Accepted Answer

An incorrect estimate of bad debt expense in one year will affect future years' income as the adjustment made to correct the estimate will impact the company's financial statements in the future.

Question 11

In general, if a company makes an incorrectly low estimate of bad debt expenses in 2016, then in later years it will have to reflect higher bad debt expenses than if it had made an accurate estimate in 2016.

Accepted Answer

This is because if the company underestimated its bad debt expenses in 2016, it would have recognized less expense in its financial statements for that year. However, in later years, when the company realizes that it has more bad debts than it estimated, it will need to recognize the additional expenses in its financial statements for those years. This will result in a higher total expense for bad debts over time than if the company had made an accurate estimate in 2016.

Question 12

One major problem with GAAP is that companies do not have to disclose that they use estimates in preparing financial statements.

Accepted Answer

This statement is false. GAAP requires companies to disclose significant accounting policies, including those related to the use of estimates, in their financial statements. Additionally, companies are required to disclose any significant changes to these policies.

Question 13

One problem with undue conservatism in accounting is that under-reporting income in one time period is often over-reporting income in later time periods.

Accepted Answer

Undue conservatism in accounting can lead to under-reporting income in one time period, which may lead to over-reporting income in later time periods when the previously under-reported income is recognized. This can result in distorted financial statements and misinform decision-making processes.

Question 14

"Aggressive" accounting tends to understate net income and assets.

Accepted Answer

"Aggressive" accounting is the practice of using accounting methods that overstate net income and assets, rather than understating them. This can be done to make a company appear more profitable or financially healthy than it actually is.

Question 15

A "conservative" balance sheet would tend to overvalue liabilities.

Accepted Answer

A conservative balance sheet takes a cautious approach, which means that it tends to overestimate liabilities and underestimate assets, resulting in a lower net worth. This approach is used to ensure that a company is not overstating its financial position, and is generally favored by investors who value stability and risk aversion.

Question 16

A "conservative" balance sheet would tend to overvalue land.

Accepted Answer

A conservative balance sheet approach tends to undervalue assets and overstate liabilities, rather than overvaluing assets like land.

Question 17

"Conservative" accounting tends to understate net income.

Accepted Answer

Conservative accounting principles dictate that potential losses are recognized before potential gains, resulting in a more cautious approach to revenue recognition and a tendency to understate net income.

Question 18

"Neutral" estimates have an equal probability of being too high and too low.

Accepted Answer

Neutral estimates do not have a bias towards overestimating or underestimating, so they have an equal chance of being too high or too low.

Question 19

In its Concepts Statements, the FASB favors conservative accounting.

Accepted Answer

The FASB does not favor conservative accounting, but rather aims for neutral and objective accounting standards that provide relevant and reliable information for financial statement users.

Question 20

Normal accounting under GAAP assumes that companies will continue to operate normally, as "going concerns."

Accepted Answer

According to the GAAP accounting principles, the assumption is that businesses will continue to operate normally as "going concerns." This assumption allows for consistency in financial reporting and decision-making.

Quiz 8: Reconciling Bank and Credit Card Statements