Estimating bad debts can be done by the percentage of sales method and the aging of accounts receivable method. Each method has its drawbacks and advantages. If the company you were reviewing used the percentage of sales method and you noted that the allowance shown on the balance sheet was growing disproportionately to the accounts receivable give possible reasons for the disproportionate growth and suggest a means to adjust this situation if necessary. See example below.

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Year Accounts Receivable Allowance Percent of A/R 2014 4,500,000 450,000 10.0% 2015 5,200,000 600,000 11.5% 2016 7,500,000 950,000 12.7% Year Accounts Receivable Allowance Percent of A/R 2014 4,500,000 450,000 10.0% 2015 5,200,000 600,000 11.5% 2016 7,500,000 950,000 12.7%

Answer rating: 100% (QA)

Here we can see there is increase in sales along with estimating bad debts and hence the sales is th... View the full answer