5.A primary weakness of the direct write-off method is that a.it is based on est
ID: 2593039 • Letter: 5
Question
5.A primary weakness of the direct write-off method is that
a.it is based on estimates.
b.it understates accounts receivable on the balance sheet.
c.the expense of a bad debt is not matched to the period that generated the uncollectible sale amount.
d.it is too difficult for many companies to use.
6.
The direct write-off method is acceptable for use by businesses when
a.a large amount of receivables will become uncollectible.
b.they have large receivable balances as a part of current assets.
c.they sell most of their goods or service for cash or credit card.
d.they make all their sales on account and do not have cash sales.
Explanation / Answer
Answer 5. C is the correct answer. In this method the expense is recorded in the income statement after the point of sale i.e. in the year after the year of sale, which in turn voilates the matching principle of GAAP.
a) This is not a weakness of the direct write off method as no write off s done on the basis of the estimates, it only write off the amount whenn all the efforts are made to realise the debtors.
b) direct write off method overstates the accounts receivable and not understate it.
d) The method is not difficult to use but it does not present the true and correct books of accounts.
Answer 6. C is the correct option. direct write off method can be aptl used when the amount involved in the colloection is not significant, so when the sales is made on cash/ credit card then the amount involved in collection will be insignificant for the business.
a) business can not use direct write off method when the amount involved is significant as it will voilate the matching principle as per GAAP.
b) when the business have large receivable balances as part of current assets, then also direct write off method will not be appropriate tp use for the business as the amount involved will be significant and GAAP allows this method only when the amount involoved is insignificant.
d) When the business make all the sales on credit then also direct write off method is not acceptable as the amount involved will be significant and it voilates the GAAP matching principle.
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