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

question 2

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 per cent of sales.However,by year-end it was aware that the rate should have really been 3 per cent 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:

Book Value Per Share

Calculated as the total equity of a company divided by the number of outstanding shares, indicating the per-share value of a company's equity.