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This case raises the question: How does a company reasonably estimate and record entries for uncollectible trade receivables, and under what circumstances are receivables written off as uncollectible? The required accounting transactions for the case involve estimating a receivables allowance both as a percentage of sales and as a percentage of accounts receivable and making specific account judgments under the direct write?off method. The subjective issues involve analyzing and assessing a company's methods of collection and accounting for bad debts.

This study aims to verify the circumstances under which managing the allowance for uncollectible accounts is used as a tool of earnings management.

The authors investigate whether bad debt expense, which is an income statement counterpart of allowance for uncollectible accounts, is adjusted downward when pre-managed earnings is slightly above zero earnings, prior year’s earnings or analysts’ forecasts.

The findings of this study show that firms manage bad debt expense downward to avoid losses, sustain the prior year’s earnings and meet or beat analysts’ forecasts. The authors also find that the understatement of bad debt expense to meet earnings benchmarks is pronounced for firms with high tax costs.

Standard setters and auditors can gain a better understanding in detail of the practices and methods of managing earnings via the allowance for uncollectible accounts.

This study is the first to examine earnings management via the allowance for uncollectible accounts in non-financial Korean firms. In addition, the findings provide the evidence that firms prefer to use the allowance for uncollectible accounts as a strategic tool to meet benchmarks, especially when their tax costs are high.

The purpose of this paper is to examine the joint effect of supervisor influence and investor perspective on novice auditors’ assessments of accounting estimates.

The experiment used a 2 × 2 between-subjects design, randomly assigning proxies of novice auditors among four conditions. The authors manipulated the supervisor’s level of emphasis on evidence that suggests accounting estimate adjustment and whether auditors are prompted to take an investor perspective. Participants were asked to assess the misstatement risk of the allowance for doubtful accounts of the client company.

The authors find that auditors assign a higher (lower) risk of misstatement when their supervisor places high (low) emphasis on evidence suggesting accounting adjustment. The authors also find that contrary to the belief that taking the perspective of investors could enhance objectivity and independence, investor perspective leads to a decrease (rather than an increase) in auditors’ perceived risk of misstatement when the supervisor places low emphasis on evidence suggesting accounting adjustment.

This study provides early evidence on the efficacy of investor perspective and is one of the first to document an unintended consequence of asking auditors to take an investor perspective.

The purpose of this paper is to examine the financial condition and ability of farmer cooperatives to withstand significant increases in bad debt expense.

A unique data set of farmer cooperative financial statements that spans from 1996 to 2019 is used to examine the changes in profitability, solvency, liquidity and accounts receivable risk. Also, a deterministic stress test model is designed to shock bad debt expense and the resulting write-off of accounts receivable for farmer cooperatives. The stress test provides insights to the resiliency of farmer cooperatives.

Results find that farmer cooperatives are in a strong financial position, which has improved over time. The majority of farmer cooperatives are able to absorb a substantial increase in bad debt expense because of their sizable, retained earnings position. However, cooperatives that have significant profitability challenges do experience much larger losses, especially mixed farmer cooperatives (roughly equally amounts of grain and farm supply sales) and large cooperatives with more than $500 million in sales.

The stress test results suggest farmer cooperative managers and boards of directors could re-examine their credit policies and consider extending additional credit. Also, cooperatives should consider monitoring and identifying an optimal accounts receivable to retained earnings ratio, which is similar to how banks examine their tier 1 capital ratios.

The value of this study is having data that allows for the examination of the financial condition of farmer cooperatives over time. Also, having current data means the accounts receivable stress test results are more relevant and timelier. This is important because these accounts receivable are primarily tied to crop input supplies, and farmer cooperatives are a significant market participant in the crop input supply market.

This case study deals with the financial accounting fraud at Sunbeam Corporation during the time “Chainsaw” Al Dunlap was the company’s CEO. This was a very pervasive fraud, involving improper revenue recognition, understatements of the reserves for sales returns and bad debts, abuse of the rules governing consignment sales, and other manipulations. While the amounts involved seem insignificant when compared to those of Enron and WorldCom, the study of Sunbeam is illuminating. Many of the problems at Sunbeam were caused by an abusive and egotistical CEO. In addition, Sunbeam’s external auditor during the period of the fraud was Arthur Andersen. Sunbeam can be viewed as being part of a continuum of audit failures extending from Waste Management to WorldCom. This case is designed in part to serve as an antidote to the coverage found in typical accounting by exposing students to a real situation in which people knowingly violated GAAP, and still received a clean audit opinion, and the company was eventually forced to declare bankruptcy.

The selection of the optimal credit investigation policy is a sequential decision problem that Mehta solved using decision tree analysis. This paper explores the managerial implications of the credit investigation/credit granting policy. The credit policy selected effects the resources required for credit investigation, the scale of collection efforts, the level and breakdown of accounts receivable, cash budgets, and total sales and production costs.

This study aims to develop a high-quality impairment loss allowance model in conformity with Indonesian Financial Accounting Standards 71 (PSAK 71) that has significant contribution to national interests and the banking industry.

The determination of the impairment loss allowance model is settled through 7 stages, using integration of some statistical methods such as Markov chain, exponential smoothing, time series analysis of behavioral inherent trends of probability of default, tail conditional expectation and Monte Carlo simulation.

The model which is developed by the authors is proven to be a high-quality and reliable model. By using the model, it can be shown that the implementation of the expected credit losses model on Indonesian Financial Accounting Standards 71 is more prudent than the implementation of the incurred loss model on Indonesian Financial Accounting Standards 55.

Determination of defaults was based on days past due, and the analysis in this study did not touch the aspects of hedge accounting in general.

This developed model will contribute significantly to national interests as a source of reference for other banks operating in Indonesia in calculating impairment loss allowance (CKPN) and can be used by the Financial Services Authority of Indonesia (OJK) as a guideline in assessing the formation of impairment loss allowance for banks operating in Indonesia.

As so far there is not yet an available standardized model for calculating impairment loss allowance on the basis of Indonesian Financial Accounting Standards 71, the model developed by the authors will be a new breakthrough in Indonesia.

Recent public policy initiatives seek greater transparency in financial reporting through an honest, balanced and thorough management discussion of company performance in the annual report. Management’s discussion invariably includes key performance indicators, such as financial ratios, relevant to external stakeholders. We model the impact of accounting estimates, assumptions, choices and errors on the risk of misleading financial ratios. This framework is illustrated through good and bad examples of financial reporting practices and by simulation of financial data of public companies. We provide a structured approach to inform policymakers, auditors and other stakeholders of the incremental financial reporting risk that accompanies current regulatory efforts.

The purpose of this paper is to present an original model, and one of practical use, for a contractor's internal analysis of the likelihood of late and incomplete payments, in an uncertain payment environment. Payments typically dominate the thinking of a contractor and the way a contractor operates. The model applies equally to subcontractors, suppliers and consultants.

The model is based on Markov chains, specially adapted to the problem, where the states are defined as the period of time by which the payment is overdue. In addition, there are special states corresponding to claims that have been paid, and those that need resolution. Transitions between states reflect the payment characteristics on the project (which itself depends on the type of project and the owner‐contractor relationship).

Real project data confirm the validity of the model. Output from the model can be shown to agree with actual contractor payment data. The output is in terms of probability of payment by a certain date, and mean time to payment for amounts owing. Such information assists the contractor in its financial management practices.

The paper gives a summary approach for contractors. A strength and paradox of the model is its simplicity in usage, yet it overlies hidden more extensive mathematics, which might generally not be known or is necessary to be known to contractors. The model analysis feeds into the contractor's cash flow calculations, overall project risk analysis and accounting procedures.

The paper represents an original contribution to the modelling and analysis of contractor payments.

T Education is a leading educational science and technology enterprise in China with technology-driven, talent intimacy and quality leadership as the core development objectives. Since its inception, it has been committed to creating better learning experience for children. As the predecessor of T-education, X-education was founded in Beijing in 2003. At first, it mainly provided after-school math counseling for school-age children. Over the past 10 years, its business has been expanding, covering almost every aspect of school-age education. This case studies accounting issues and business ethics challenges that firms may face when they transform from a single (traditional education) line of business to a multiple channel business.