Final answer:
The Swathmore clothing corporation uses the allowance method to plan for uncollectible accounts, similar to how well-run banks account for potential loan defaults in their financial planning. Both practices emphasize the importance of anticipating financial risks and adjusting strategies accordingly to maintain a stable financial status.
Step-by-step explanation:
Understanding Allowance Method for Uncollectible Accounts
The Swathmore clothing corporation, by granting customers 30 days’ credit, is providing a short-term loan. To manage the potential risk of customers not being able to repay, the company uses the allowance method for its uncollectible accounts receivable. Under this method, the company makes a monthly bad debt accrual, which is 2% of the credit sales amount for each month. At the fiscal year-end, they conduct an aging of accounts receivable and adjust the allowance for uncollectible accounts accordingly. This practice helps in reflecting a more accurate financial position of the company.
Such allowance methods are paralleled in the banking sector. A well-run bank will account for the possibility of loan defaults by assuming a small percentage will occur. These expected losses are factored into their planning and financial statements. However, if loan defaults increase unexpectedly, it can lead to significant financial strain on the institution, as depicted in the example where Safe and Secure Bank's assets declined sharply due to unexpected defaults. This action not only affects the bank's balance sheet but also its net worth, potentially leading to a negative net worth in severe cases.
Overall, both the Swathmore clothing corporation and a well-run bank illustrate the importance of prudent financial planning and risk management in maintaining financial stability.