Question

Assuming Alpha company uses the percent of receivables method to determine the amount of uncollectible expense, which of the following shows how the recognition of the expense will affect Alpha's financial statements?

Balance sheet Income Statement Statement of Cash Flows
Assets = Liab. + Equity Rev. − Exp. = Net Inc.
A. − = NA + − NA − + = − + OA
B. + = NA + + NA − + = − − OA
C. + = NA + + + − NA = + NA
D. − = NA + − NA − + = − NA

Answer 1

Recognition of uncollectible expense by Alpha company using the percent of receivables method decreases assets and net income but does not immediately affect the statement of cash flows.

Step-by-step explanation:

When Alpha company recognizes an expense for uncollectible accounts using the percent of receivables method, it will decrease assets on the balance sheet (specifically accounts receivable) and increase expenses on the income statement, thereby reducing net income. This accounting entry does not affect cash at the time of recognition; thus, there is no immediate impact on the statement of cash flows since the expense was already incurred through credit sales.

The correct impact on Alpha's financial statements is reflected as:

• Assets decrease (due to writing off receivables).
• Expenses increase (due to recognizing bad debt expense).
• Net income decreases as a result of the increased expense.

This results in answer choice A: Assets decrease, no immediate change to liabilities, equity decreases, revenue unchanged, expenses increase, net income decreases, and no direct effect on the statement of cash flows operating activities (OA).