Asked by Garrett Wynne on Jul 12, 2024
Verified
A disadvantage of basing bad debt expense on the historical relationship between actual bad debts and the outstanding accounts receivable balance at the end of the year is that
A) it may not appropriately match current expenses against current revenues
B) it provides a reasonable estimate of the accounts receivable net realizable value
C) it is not a generally accepted accounting procedure
D) it is an income statement approach
Historical Relationship
Refers to the analysis of past interactions or correlations between variables to predict future trends or behaviors.
Bad Debt Expense
This refers to the amount of receivables a company does not expect to collect and hence records as an expense on its income statement.
Outstanding Accounts Receivable
Amounts owed to a business by its customers for goods or services delivered but not yet paid for.
- Evaluate the adoption of different procedures for determining bad debts and their consequences on balancing earnings with outlays.
Verified Answer
LF
Lorraine FisherJul 16, 2024
Final Answer :
A
Explanation :
Basing bad debt expense solely on historical relationships does not take into account changes in the current economic environment, customer creditworthiness, or other factors that may impact the collectibility of accounts receivable. As a result, bad debt expense may not accurately match with current revenues, which could lead to distortions in the company's financial statements.
Learning Objectives
- Evaluate the adoption of different procedures for determining bad debts and their consequences on balancing earnings with outlays.