Patrick had worked in the garment business for years and had set up a small clothing outlet as a front for a scheme. At first, he placed small orders with a few carefully chosen manufacturers and made sure to pay promptly. After a few months, he used those companies as credit references, and placed progressively larger orders with bigger outfits. Then, with a good track record of payments, he started buying from FiestaWear, a trendy, upmarket apparel factory in Los Angeles. After two years, he sprung the trap. He placed a $280,000 order for garments from FiestaWear and asked them to “expedite” the delivery. The moment the merchandise arrived, his rented trucks rushed the goods to Mexico, he closed up his outlet, and vanished into the woodwork. When FiestaWear realized that something was fishy, it called the FBI. The company had been duped by a ploy known as the “overbuy.” The merchandise was easy for Patrick to sell on the black market.
Requirements
1. What can a company do to protect against this kind of business risk?
2. Where does the expense for uncollectible accounts get reported in the financial statements?