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Which of the following best explains why not every purchase made on credit appears immediately on a company's account statement when using the direct write-off method for accounts receivable?
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7. Receivables and Investments
Net Accounts Receivable: Direct Write-off Method
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Which of the following costs is irrelevant to business decisions when using the direct write-off method for uncollectible accounts?
A
Sunk costs
B
Allowance for doubtful accounts
C
Collection costs
D
Bad debt expense
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Understand the concept of sunk costs: Sunk costs are costs that have already been incurred and cannot be recovered. These costs are irrelevant to future business decisions because they do not change regardless of the outcome of the decision.
Review the direct write-off method: This method records bad debt expense only when an account is deemed uncollectible. It does not involve estimating uncollectible accounts or using an allowance for doubtful accounts.
Analyze the relevance of allowance for doubtful accounts: Under the direct write-off method, the allowance for doubtful accounts is not used, making it irrelevant to this method.
Evaluate collection costs: Collection costs are relevant to business decisions as they are incurred in the process of recovering receivables.
Assess bad debt expense: Bad debt expense is directly recorded under the direct write-off method when an account is deemed uncollectible, making it relevant to business decisions.
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