A Method of Estimating Bad Debts That Focuses on the Income

question 28

Multiple Choice

A method of estimating bad debts that focuses on the income statement rather than the balance sheet is the allowance method based on:

• A) direct write off.
• B) percentage of credit sales.
• C) the balance in the trade receivable accounts.
• D) aging the trade receivable accounts.

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Definitions:

Interest Tax Shield

The reduction in income taxes that results from taking an allowable deduction for interest expenses.

Interest Tax Shield

The decrease in income taxes that occurs by subtracting a permitted deduction, like debt interest, from taxable income.

Levered Firms

Companies that employ debt (loans or bonds) in their capital structure alongside equity (stocks).

Unlevered Firms

Companies that operate without using debt or borrowed capital in their capital structures.