- CFA Exams
- CFA Level I Exam
- Topic 3. Financial Statement Analysis
- Learning Module 21. Financial Analysis Techniques
- Subject 4. Ratios Used in Equity Analysis, Credit Analysis, and Segment Analysis
CFA Practice Question
What statement(s) is (are) true?
II. Writing off bad debt against the income statement would reduce receivable days.
I. Even among similar firms, financial ratios may be misleading, since each firm has latitude in choosing its own accounting methods.
II. Writing off bad debt against the income statement would reduce receivable days.
Correct Answer: I and II
User Contributed Comments 8
| User | Comment |
|---|---|
| omf24 | Why is 2 correct? |
| CFALucille | same amount of sales, fewer receivables on the books, means receivable turnover would be higher and receivable days would be lower. although ratio would look better, income would suffer because of charge-off |
| azramirza | Also..bad debt=dec in AR=inc in rec turnover ratio=dec in receivable days |
| cleopatraliao | THANKS azramirza:D |
| justbassbaby | why is II true? If using allowance method, writing off bad debt doesnt have impact in net AR |
| hoyleng | justbassbaby: the question didnt specific allowance method is used. |
| johntan1979 | Neither did the question specify direct write off method is used. Generally, it should be assumed that the allowance method is used, since that is the default US GAAP practice. |
| Inaganti6 | I think John Tan will be on the CFAI board one day. |