Question

You are the accountant in charge of recording the allowance for doubtful accounts at your company. Assume that based on prior history, you calculate that a $30,000 adjustment to allowance for doubtful accounts is needed to reflect Bad Debts Expense in the current period. When you report to your CFO that you are about to record $30,000 to Bad Debts Expense, she tells you to only record $10,000. When you ask why, she responds that $30,000 would reduce your Net Income below the company goal for the quarter.

Is the request from the CFO appropriate? Why or why not?

Answer 1

Answer:

Explanation:

As per predence concept profis to be recognised only when they are realised but losses to be recognised that is all the known losses to be recognised and a provision to be created

In this accountant was provided provision of Doubtful Debts $30,000 is correct as furture losses to be recognised immediatly but the CFO ask to record provision only by $10,000 other wise Net Income is below the goal is not proper as per standard

It would result in inflation of profit and amounts Disclosed in Financial Statements of a company.

Hence,
=> CFO was not appropriate with his Decision it is Deviation of the prodence concept
=> Next financial statements attain great significance various users relay on the financial statements for various purpose

Some of the users of financial statements are:

1. Lenders - To know credit worthyness.
2. Customers - For moving it Maintaing quality.
3. Employees - For getting bonus etc.
4. Banks - To know repayment capacity.
5. Government - For prompt payment of taxes they must be prepared as per relavant standard and in True and fair manner.