Accounting and Receivables

Question 1

What is the direct write-off method?

Answer 1

A method of accounting for bad debts where the expense is recognized when an account is deemed uncollectible.

Question 2

True or False: The direct write-off method is allowed under GAAP.

Answer 2

False.

Question 3

What happens to accounts receivable when using the direct write-off method?

Answer 3

Accounts receivable are reduced by the amount deemed uncollectible.

Question 4

In which situation is the direct write-off method typically used?

Answer 4

It is typically used by small businesses with a few accounts receivable.

Question 5

Fill in the blank: The direct write-off method records bad debt expense at the time the account is __________.

Answer 5

determined to be uncollectible.

Question 6

What is a disadvantage of the direct write-off method?

Answer 6

It can violate the matching principle of accounting.

Question 7

True or False: The direct write-off method can lead to fluctuating income statements.

Answer 7

True.

Question 8

What journal entry is made when a bad debt is written off under the direct write-off method?

Answer 8

Debit Bad Debt Expense and Credit Accounts Receivable.

Question 9

Multiple Choice: Which of the following is NOT a characteristic of the direct write-off method? A) Simplicity B) Use of estimates C) Immediate recognition of bad debt D) Impact on cash flow

Answer 9

B) Use of estimates.

Question 10

What is the impact of the direct write-off method on tax reporting?

Answer 10

It allows businesses to deduct bad debts in the year they are written off.

Question 11

Fill in the blank: Under the direct write-off method, bad debts are recorded as __________ when they are written off.

Answer 11

an expense.

Question 12

What is one key reason businesses may prefer the direct write-off method?

Answer 12

Its straightforward approach and ease of implementation.

Question 13

True or False: The direct write-off method is more accurate than the allowance method.

Answer 13

False.

Question 14

What type of businesses commonly use the direct write-off method?

Answer 14

Small businesses with fewer uncollectible accounts.

Question 15

What accounting principle does the direct write-off method conflict with?

Answer 15

The matching principle.

Question 16

Multiple Choice: Which method is more commonly used for larger businesses? A) Direct write-off B) Allowance method

Answer 16

B) Allowance method.

Question 17

Fill in the blank: The direct write-off method does not involve estimating bad debts, unlike the __________ method.

Answer 17

allowance.

Question 18

What must a business demonstrate to use the direct write-off method for tax purposes?

Answer 18

That the debts are actually uncollectible.

Question 19

Short Answer: Name one advantage of the direct write-off method.

Answer 19

Simplicity and ease of record-keeping.

Question 20

True or False: The direct write-off method requires a detailed analysis of receivables.

Answer 20

False.

Question 21

What is the main reason the direct write-off method is not compliant with GAAP?

Answer 21

It does not adhere to the matching principle.

Question 22

Fill in the blank: Under the direct write-off method, bad debt expense is recorded __________ the accounts receivable are written off.

Answer 22

after.

Question 23

What is a potential problem when using the direct write-off method during financial reporting?

Answer 23

It can result in distorted financial statements.

Question 24

Short Answer: Describe a scenario where the direct write-off method might be appropriate.

Answer 24

When a company has a small number of accounts and minimal bad debt.

Question 25

Multiple Choice: Which of the following is a primary drawback of the direct write-off method? A) Complexity B) Timing of expense recognition C) Difficulty in tracking receivables D) None of the above

Answer 25

B) Timing of expense recognition.