A team of accounting students is working on a case where they are required to assess a
Question:
• The company’s allowance for bad debts has been 5% of its receivables for the last several years.
• This year, the company has strengthened its credit extension policy.
• The average time that an accounts receivable has been outstanding has increased from 40 to 50 days this year.
• The economy has weakened over the year, with a pending recession.
Below is part of the discussion at their first team meeting. Analyze the discussion and determine the type of cognitive bias most consistent with the statements made by each student, providing an explanation for your answer.
Discussion
Tom initiated the discussion saying, “I have seen this kind of situation before when a company has to report a higher allowance than last year. Allowances are always increasing.
” Jennifer offered, “The first piece of information in the case is always the most important. The bad debts have historically been 5%. Therefore, the allowance has to be 5%.
” Jake added, “As I look at the case, I keep coming back to the fact that the average time that an account receivable has been outstanding has increased by 10 days. In my view, this is the most important piece of information— the other facts don’t matter.”
Marina’s view was “Even though the economy has deteriorated, the historical data is always more important.
The general trends in the economy are not relevant.” Accounts Receivable
Accounts receivables are debts owed to your company, usually from sales on credit. Accounts receivable is business asset, the sum of the money owed to you by customers who haven’t paid.The standard procedure in business-to-business sales is that...
Fantastic news! We've Found the answer you've been seeking!
Step by Step Answer:
Related Book For
Intermediate Accounting
ISBN: 978-0132162302
1st edition
Authors: Elizabeth A. Gordon, Jana S. Raedy, Alexander J. Sannella
Question Posted: