An analyst notes that ABC Inc.'s allowance for uncollectible accounts as a percentage of year-end accounts receivable has changed.Which of the following would be a plausible explanation for the change?
A)ABC's management expects a default rate on outstanding receivables different than that which has occurred in prior years.
B)ABC's management is using bad debt accruals to "manage" earnings.
C)The company ages its receivables and the distribution of accounts receivable over the various age categories is different than in prior years.
D)All of these are plausible reasons for the noted change.

Question

Quizplus · Accepted Answer

Each of the provided options (A, B, and C) offers a plausible explanation for why ABC Inc.'s allowance for uncollectible accounts as a percentage of year-end accounts receivable might change. Option A suggests a change in management's expectations about the default rate, which directly affects the allowance for uncollectible accounts. Option B indicates that management might be manipulating earnings through bad debt accruals, which can also lead to changes in the allowance. Option C points out that a change in the aging of receivables could alter the distribution and, consequently, the allowance for uncollectible accounts. Therefore, all these reasons are plausible explanations for the observed change.

An Analyst Notes That ABC Inc