CFA Practice Question

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CFA Practice Question

What statement(s) is (are) true?

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.
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