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On December 31, 2010, Priya Co. has accounts receivable of $400,000. It uses the direct write-off method of accounting for bad debts because this is what is required for determining its U.S. taxable net income. The opinion of management is that what is acceptable to the Internal Revenue System should be acceptable under generally accepted accounting procedures. However, its independent auditor disagrees with this impassioned argument and does not accept the direct write-off method of accounting for bad debts.
Present the reason(s) for the auditor's objection to the direct write-off method, and indicate the method that must be used under GAAP. Indicate how Priya's 2010 net income, current ratio, and quick ratio will be affected by following the auditor's position.
Efficient Frontier
In finance and operations, a concept that identifies the optimal portfolio of investments or resources that offers the highest expected return for a given level of risk.
Bullwhip Effect
A phenomenon in supply chains where small fluctuations in demand at the retail level cause progressively larger fluctuations in demand at the wholesaler, manufacturer, and raw material supplier levels.
Behavioral Obstacles
Psychological factors or habits that impede individuals or organizations from making rational or optimal decisions.
Bullwhip Effect
A phenomenon in supply chains where small variations in demand at the consumer level cause increasingly larger variations in demand upstream.
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