Management Uses the Ageing Approach Method to Calculate the Allowance

question 13

Multiple Choice

Management uses the ageing approach method to calculate the allowance for doubtful debts. An analysis of the ageing of accounts receivable shows a substantial increase in the accounts receivable in the over-90-days category. Management does not adjust the allowance for doubtful debts at year-end. As a result:

• A) assets are overstated, and net income is overstated.
• B) assets are overstated, and net income is understated.
• C) assets are understated, and net income is overstated.
• D) assets are understated, and net income is understated.

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Definitions:

Compounded Annually

Definition: Refers to the calculation and addition of interest to the principal sum of a loan or deposit once every year.

Debt

money that is owed or due to be paid to someone else, often as a result of borrowing funds.

Investment Account

An account held at a financial institution that is used for investing in securities, such as stocks, bonds, and mutual funds.

Withdraw

The process of withdrawing money from a bank account or investment.