Which of the following circumstances might indicate that management is manipulating the allowance for doubtful accounts?
A) A company tightens its credit standards and the allowance account increases
B) A company lowers its credit standards and the allowance account decreases
C) A company tightens its credit standards and the allowance account decreases
D) A company lowers its credit standards and the allowance account increases

Question

Quizplus · Accepted Answer

When a company lowers its credit standards, it is likely to experience an increase in the number of customers who may default on their payments. Therefore, a logical response would be to increase the allowance for doubtful accounts to reflect the higher risk of bad debts. If the allowance account decreases instead, it might suggest that management is attempting to manipulate earnings by underestimating the allowance for doubtful accounts, making the company's financial condition appear better than it actually is.

Which of the Following Circumstances Might Indicate That Management Is