Principles of Financial Accounting · free preview
Receivables and Earnings Management
Estimates of uncollectible accounts sit inside reported profit, so the allowance account can become a lever for smoothing earnings, which means small changes in the bad debt estimate deserve analyst scrutiny.
1. Estimates inside earnings
Estimates inside earnings
2. Smoothing with the allowance
Smoothing with the allowance
3. Signals analysts watch
Signals analysts watch
4. The ethical line for accountants
The ethical line for accountants
5. Why the allowance is a lever
Why can the bad debt allowance become a tool for earnings management?
6. Income smoothing pattern
Which pattern is consistent with income smoothing through the allowance?
7. DSO and allowance consistency
A company's DSO lengthens for three straight quarters while its allowance percentage of receivables stays unchanged. What is the concern?
8. The ethical standard for estimates
What standard governs an accountant's allowance estimate?
9. Allowance direction effect
Raising the bad debt estimate by 1,000 dollars decreases current net income by how many dollars, ignoring taxes? Number only.
10. Days sales outstanding signal
Credit terms are net 30 and DSO has drifted from 32 to 51 days over a year. Compute the drift in days. Give the number only.
Practice this interactively
Free account · instant grading · spaced review that schedules itself.
Start this course for free