Which of the following items should alert the analyst to the potential for manipulation when analyzing accounts receivable and the allowance for doubtful accounts?
A)Sales, accounts receivable and the allowance for doubtful accounts are all growing at approximately the same rate.
B)A company lowers its credit standards and also increases the balance in the allowance for doubtful accounts.
C)Accounts receivable is growing at a large rate and the allowance for doubtful accounts is decreasing.
D)An analysis of the "Valuation and Qualifying Accounts" schedule required in the Form 10-K reveals that the amounts recorded for bad debt expense are close in amount to the actual amounts written off each year.

Question

Quizplus · Accepted Answer

C) indicates a potential for manipulation because if accounts receivable is growing significantly while the allowance for doubtful accounts is decreasing, it suggests that the company might be overly optimistic about its ability to collect on its receivables, potentially overstating its financial health.

Which of the Following Items Should Alert the Analyst to the Potential