Research evidence suggests that
A)companies increase bad debt expense when earnings are otherwise low and then decrease the expense when earnings are high.
B)companies reduce bad debt expense when earnings are otherwise low and then increase the expense when earnings are high.
C)there is no correlation between bad debt expense and earnings levels.
D)a company's ratio of allowance for uncollectibles to gross receivables should always be close to the average for its industry.

Question

Quizplus · Accepted Answer

Research evidence suggests that companies decrease bad debt expense when earnings are otherwise low and then increase the expense when earnings are high. This behavior is known as earnings management, where companies manipulate their financial statements to achieve desired levels of reported earnings. By reducing bad debt expense during a low-earning period, companies can inflate their earnings and create a more positive image for investors. Conversely, by increasing bad debt expense during a high-earning period, companies can lower their reported earnings and avoid higher taxes.

Research Evidence Suggests That