Question

Daniel is concerned about the cash receipts schedule of his business since all of the business's customers deal in credit instead of cash. Based on historical data, he is expecting to receive collections on accounts receivable (A/R) as follows: 55

1) In the month of April, uncollectible sales of 755 are taken as a direct write-off to A/R, and the budgeted ending balance of A/R on April 30 is755.

2) In the month of March, uncollectible sales of 675 are taken as a direct write-off to A/R, and the budgeted ending balance of A/R on March 31 is7470.

3) In the month of February, uncollectible sales of 675 are taken as a direct write-off to A/R, and the budgeted ending balance of A/R on February 28 is6795.

4) In the month of January, uncollectible sales of 6075 are taken as a direct write-off to A/R, and the budgeted ending balance of A/R on January 31 is0.

Answer 1

The student's question involves a business scenario where uncollectible accounts receivable are written off in different months, affecting the cash receipts and A/R balance. It highlights the significance of proper accounting methods and internal controls in business to manage finances effectively. The scenario also discusses the impact of loan defaults on a bank's financial stability.

Step-by-step explanation:

The student's question involves analyzing cash receipts and understanding how uncollectible accounts receivable (A/R) are handled in business, specifically within the context of Daniel's business, where customers are dealing on credit. Based on given data, Daniel is expecting to write off certain amounts as uncollectible in different months. In January, for instance, uncollectible sales of $6075 are written off, leaving the ending balance of accounts receivable at $0, suggesting that all sales (and thus A/R) for January are uncollectible. Similarly, for February, uncollectible sales of $675 are written off against the ending balance of A/R, which is $6795, and so forth for March and April with respective uncollectibles of $675 and $755 against ending balances of $7470 and $755. This practice of direct write-off affects the business's cash receipts schedule and the ending balance of A/R.

In business accounting, this direct write-off method is not the preferred approach for large businesses as it can distort the income statement and balance sheet of the business when significant write-offs occur. Instead, the allowance method is typically used, where an estimate for doubtful accounts is made in advance and adjusted as actual write-offs occur.

Noel's experience with the equipment bill showcases the significance of internal controls and vigilant review processes to prevent overpayments and errors in the accounting system.

The Safe and Secure Bank scenario emphasizes the impact of loan defaults on a bank's net worth, illustrating how unexpected increases in loan defaults can cause substantial declines in a bank's assets and overall financial stability. This reflects the importance of banks including a risk factor for loan defaults in their financial planning.