Fast Ed's auto showroom sells cars. Fast Ed's bank requires the company to submit quarterly financial statements (Links to an external site.) in order to keep its line of credit. Note Receivable and Accounts Receivable (Links to an external site.) are 50 percent of current assets (Links to an external site.). Therefore, Bad-Debt Expense and Allowance for Doubtful Accounts are important accounts.

Fast Ed's president, Ed Edwards, likes net income to increase in a smooth pattern rather than to increase in some periods and decrease in other periods. To report smoothly increasing net income, Edwards underestimates bad-debt expense in some accounting (Links to an external site.) periods. In other accounting periods, Edwards overestimates the expense. He reasons that the income overstatements roughly offset the income understatements over time.

Required:

 - Is Fast Ed's practice of smoothing income ethical? Give your reasons, mentioning any accounting principles that might be violated.

 - How would you change the accounting of bad debt to make it more ethical for Fast Ed? 

- Write a SHORT memo to Fast Ed as the companies accountant. tell them why he needs to change his bad debt practices, explain the ethics, and what changes you would make to the accounting process. 

Answer rating: 100% (QA)

1 Income Smoothing Income smoothing at times can be considered legal In such cases a business can re... View the full answer