Why Is the Direct Write-Off Method Not Allowed Under GAAP

question 56

Multiple Choice

Why is the direct write-off method not allowed under GAAP to account for doubtful accounts?

• A)It is too difficult to implement.
• B)It is allowed in certain circumstances.
• C)It violates the expense recognition principle ("matching").
• D)It is only allowed under IFRS.

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Definitions:

Excess Capacity

The situation in which a firm's actual production is less than its maximum possible production capacity.

Economic Profits

The surplus left after a firm has paid all its costs, including both explicit costs like wages and rent and implicit costs like the opportunity costs of capital.

Monopolistic Competitor

Refers to a market structure where many companies sell products that are similar but not identical, allowing them some power to set prices.

Profit

Profit is the financial gain realized when the amount earned from a business activity exceeds the expenses, costs, and taxes needed to sustain the activity.