The practice of reporting the net realizable value of receivables in the financial statements is commonly called:
A) the cash flow method of accounting for uncollectible accounts.
B) the direct write-off method of accounting for uncollectible accounts.
C) the allowance method of accounting for uncollectible accounts.
D) Both A and B are correct.

Question

Quizplus · Accepted Answer

The practice of reporting the net realizable value of receivables in the financial statements is known as the allowance method of accounting for uncollectible accounts. In this method, an allowance for doubtful accounts is established based on an estimated percentage of uncollectible accounts. The allowance is then subtracted from the total accounts receivable to arrive at the net realizable value. Option A refers to the cash flow method, which involves recording bad debt expenses when they are actually written off. Option B is the direct write-off method, in which bad debts are recorded as an expense when they are identified as uncollectible.

The Practice of Reporting the Net Realizable Value of Receivables