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.

emeraldkoala687

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.

chocolateeel184

On December 31, the unadjusted trial balance of Leeâs CoffeeDistributor contains the following:

	Debit	Credit
Accounts Receivable	240,000
Allowance for Doubtful Accounts		3,000
Cash Sales		1,500,000
Credit Sales		950,000

The A/R subsidiary ledger yields the following aging [terms are1/10, n/30] and subsequent analysis:

Total	Current	1-30 days past due	31-60 days past due	61-90 days past due	More than 90 days past due
$240,000	110,000	60,000	30,000	10,000	30,000
Write-off percentage	1.50%	4.00%	7.00%	10.00%	25.00%
Estimated write-off

Assume that instead of the A/R aging method [% of receivablesapproach], Lee's Coffee Distributors uses the % of credit salesapproach with respect to the allowance method for bad debts, andthe prior 5 year history through December 31 of the current yearshows write-offs have averaged 1.5% of credit sales. Which one ofthe following statements is correct (true) as of December 31 of thecurrent yea

On December 31, the unadjusted trial balance of Leeâs CoffeeDistributor contains the following:

	Debit	Credit
Accounts Receivable	240,000
Allowance for Doubtful Accounts		3,000
Cash Sales		1,500,000
Credit Sales		950,000

The A/R subsidiary ledger yields the following aging [terms are1/10, n/30] and subsequent analysis:

Total	Current	1-30 days past due	31-60 days past due	61-90 days past due	More than 90 days past due
$240,000	110,000	60,000	30,000	10,000	30,000
Write-off percentage	1.50%	4.00%	7.00%	10.00%	25.00%
Estimated write-off

Assume that instead of the A/R aging method [% of receivablesapproach], Lee's Coffee Distributors uses the % of credit salesapproach with respect to the allowance method for bad debts, andthe prior 5 year history through December 31 of the current yearshows write-offs have averaged 1.5% of credit sales. Which one ofthe following statements is correct (true) as of December 31 of thecurrent year?

A. The net A/R reported on the balance sheet would be$225,750

B. The AJE made would include a debit to "bad debt expense" for$11,250

C. The write-off % of 1.5% used for the current year AJE issmaller than the write-off % used to make the prior year AJE.

D. The AJE made would be included as an "outflow of cash" in theoperating activities section of the statement of cash flows.

tantortoise158

ACC 100 Study Guide - Final Guide: Accounts Receivable

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