Financial Reporting and Analysis Q86

0. A company records a doubtful accounts expense of $4 million in 2015. What is the most appropriate interpretation of this expense?

A
The expense represents credit losses on customer receivables in 2015.
B
The expense represents an estimate of how much of the 2015 revenue will ultimately be uncollectible.
C
The net revenue shown on the income statement will be reduced by $4 million.

Answer
Comment
Array

Option : B
Explanation : Option A depicts the „direct write-off method‟ which is a violation of the matching principle. Option B is consistent with the matching principle. Option C is not correct because the doubtful accounts expense is shown as a separate expense on the income statement and not as a reduction in revenue.

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