QUESTION: Paraphrase this article into your ownwords.
Article: Assessing the Allowance for DoubtfulAccounts
This article describes three techniques for assessing allowancefor doubtful accounts estimates and complying with Statement onAuditing Standards (SAS) no. 57 and AU section 342, AuditingAccounting Estimates, which suggest auditors compare prioraccounting estimates with subsequent results to evaluate thereliability of the process used to develop estimates.
TECHNIQUES FOR ANALYZING THEESTIMATE-GENERATING
The techniques use historical data, they give an indication ofthe effectiveness of past.
Technique 1: Compare bad debt expense (BDE) to write-offs(WO)
Bad debt expense recorded in a specific year implies thenecessity for write-offs during that year and subsequent years.While it is unrealistic to expect estimated bad debt expense toperfectly match actual write-offs in a given year, it is reasonableto expect the ratio of bad debt expense to write-offs to be closeto 1.0 over an extended period.
Technique 2: Compare beginning allowance for doubtful accounts(BADA) to write-offs (WO)
This ratio is computed each year using the beginning-of-yearallowance for doubtful accounts as the numerator and write-offs ofaccounts receivable recorded during the year as the denominator.The beginning-allowance-to-write-offs ratio indicates howadequately the allowance accommodated subsequent write-offs. Lowerratios suggest the beginning-of-year allowance may not have beenlarge enough to absorb impending write-offs, while inordinatelyhigh ratios might indicate the entity was accumulating excessiveallowances.
Technique 3: Assess the allowance exhaustion rate
Exhaustion rates indicate the time (expressed in years) taken touse the beginning-of-year allowance in the form of actualwrite-offs.
Assessing the effectiveness of past estimates provides apotential basis for confidence in future estimates. The techniquesillustrated in this article are designed to help with and clarifyassessment of an entityâs past success in estimating its allowancefor doubtful accounts. While economic circumstances vary,historical trends provide useful information about the process usedto form estimates.
QUESTION: Paraphrase this article into your ownwords.
Article: Assessing the Allowance for DoubtfulAccounts
This article describes three techniques for assessing allowancefor doubtful accounts estimates and complying with Statement onAuditing Standards (SAS) no. 57 and AU section 342, AuditingAccounting Estimates, which suggest auditors compare prioraccounting estimates with subsequent results to evaluate thereliability of the process used to develop estimates.
TECHNIQUES FOR ANALYZING THEESTIMATE-GENERATING
The techniques use historical data, they give an indication ofthe effectiveness of past.
Technique 1: Compare bad debt expense (BDE) to write-offs(WO)
Bad debt expense recorded in a specific year implies thenecessity for write-offs during that year and subsequent years.While it is unrealistic to expect estimated bad debt expense toperfectly match actual write-offs in a given year, it is reasonableto expect the ratio of bad debt expense to write-offs to be closeto 1.0 over an extended period.
Technique 2: Compare beginning allowance for doubtful accounts(BADA) to write-offs (WO)
This ratio is computed each year using the beginning-of-yearallowance for doubtful accounts as the numerator and write-offs ofaccounts receivable recorded during the year as the denominator.The beginning-allowance-to-write-offs ratio indicates howadequately the allowance accommodated subsequent write-offs. Lowerratios suggest the beginning-of-year allowance may not have beenlarge enough to absorb impending write-offs, while inordinatelyhigh ratios might indicate the entity was accumulating excessiveallowances.
Technique 3: Assess the allowance exhaustion rate
Exhaustion rates indicate the time (expressed in years) taken touse the beginning-of-year allowance in the form of actualwrite-offs.
Assessing the effectiveness of past estimates provides apotential basis for confidence in future estimates. The techniquesillustrated in this article are designed to help with and clarifyassessment of an entityâs past success in estimating its allowancefor doubtful accounts. While economic circumstances vary,historical trends provide useful information about the process usedto form estimates.
