Management Uses the Percentage-Of-Sales Approach Method to Calculate the Allowance

question 5

Multiple Choice

Management uses the percentage-of-sales approach method to calculate the allowance for doubtful debts.Management calculated the allowance for doubtful debts on the basis of 2% of sales.However,by year-end it was aware that the rate should have really been 3% of sales.Management does not adjust the allowance for doubtful debts at year-end.As a result:

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

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Definitions:

Real GDP

The measure of a country's economic output adjusted for price changes (inflation or deflation), providing a more accurate reflection of an economy's size and how it’s growing over time.

GDP Deflator

A measure of the level of prices of all new, domestically produced, final goods and services in an economy, used to convert nominal GDP into real GDP.

Deflation

A decrease in the general price level of goods and services, often indicating reduced consumer demand or excess supply.

Inflation

A general increase in prices and fall in the purchasing value of money over time.