CFA Practice Question

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CFA Practice Question

Which of the following statement(s) is (are) FALSE?

I. The direct write-off method of recognizing uncollectible accounts expense has the advantage of matching revenue with expenses of the same accounting period.
II. Collection of an account receivable increases a company's cash flow as well as its net income.
III. The allowance for doubtful accounts is a contra account.
IV. The net realizable value of accounts receivable decreases each time an account receivable is written off through the allowance method.
Correct Answer: I, II and IV

III. As an estimated amount of uncollectible receivables, the allowance account is deducted from (contra to) the gross amount of accounts receivable to determine the net realizable value of the accounts receivable.

IV. The write-off reduces the allowance account and the accounts receivable account by the same amount. Therefore the net realizable value remains unchanged.

User Contributed Comments 5

User Comment
chicyvan why I, II , IV
yael I. False. The direct write off method identifies specific AR which are worthless. It does not match revenues and expenses in the same accounting period.
II. False. Collection of accounts receivable is recorded as a debit to Cash and a credit to accounts receivable. It increases the company's cash flow (debit to cash). But it does not affect income. (Both Cash and AR are Balance Sheet items)
III. True. Allowance for AR is a contra account. Meaning, for balance sheet reporting purposes, it is deducted from Accounts Receivable.
IV. False. When an accounts receivable is written off using the allowance method, the entry is a debit to Allowance for Doubtful Accounts and a Credit to Accounts Receivable. Net realizable value is AR less allowance. Hence, when allowance method is use, there is a deduction of allowance for doubtful accounts, and a corresponding deduction of AR account. Therefore net realizable value remains unchanged. Hope this helps
prachirp Very nice explanation.
rfvo Agreed, nice 1 Yael
ana2 thanks yael. very helpful
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