Final answer:
Using the percent of receivables method to record uncollectible expense decreases assets—specifically, Accounts Receivable—on the balance sheet, increases Bad Debt Expenses on the income statement, thus reducing net income, and does not affect the statement of cash flows as it is a non-cash transaction.
Step-by-step explanation:
When Alpha company uses the percent of receivables method to determine the amount of uncollectible expense, it affects the financial statements in the following way: The recognition of the uncollectible expense will decrease assets (Accounts Receivable) on the balance sheet and increase expenses on the income statement, which lowers net income. This sequence of events aligns with answer choice A. In the context of the statement of cash flows, this adjustment does not affect cash since it's a non-cash expense adjustment.
The entry to record the expense will increase the Allowance for Doubtful Accounts (a contra asset account) and increase the Bad Debt Expense on the income statement. On the balance sheet, the total assets will decrease because Accounts Receivable is netted against the allowance. However, cash and cash equivalents, as seen on the statement of cash flows, remain unaffected since this adjustment reflects an estimation of potential future cash flow loss rather than an immediate cash outflow.
Accounts Receivable are adjusted to reflect an estimated uncollectible accounts expense, which, in turn, decreases net income, showing a more accurate financial position and performance of the company. Given an example of a bank, if there is an unexpected wave of loan defaults, the value of loans (an asset) would decrease significantly, causing assets to decline and potentially leading to negative net worth for the bank.