Unit 3: Accounts Receivable & Estimation Risk

.• The difference between cash sales and credit sales
• Why corporations sell on account
• The risks associated with accounts receivable
• The difference between the Direct Write-Off Method and the Allowance Method
• How bad debt expense is estimated
• How the Allowance for Doubtful Accounts functions as a contra asset
• How write-offs impact accounts receivable and the allowance account
• How collections of previously written-off accounts are recorded
• How aging schedules estimate uncollectible accounts

.Students will:

• Record credit sales transactions
• Calculate bad debt expense using percentage-of-sales method
• Journalize adjusting entries for the allowance method
• Record write-offs of specific accounts
• Record recovery of written-off accounts
• Create and analyze an aging of accounts receivable schedule
• Use Excel to model different estimation scenarios
• Compare how different assumptions impact net income
• Evaluate internal control weaknesses related to receivables
• Identify potential earnings manipulation risks

Students will complete a structured receivables simulation that includes:

1. Recording credit sales and collections

2. Preparing an aging schedule of accounts receivable

3. Estimating bad debt expense using an approved method

4. Recording the adjusting entry for the Allowance for Doubtful Accounts

5. Recording a write-off and recovery of an account

6. Analyzing the impact of their estimate on:
   – Net income
   – Total assets
   – Financial statement reliability

7. Comparing their estimate to a more aggressive or more conservative estimate

8. Writing a professional justification defending their estimation decision

9. Identifying internal control recommendations to reduce credit risk

10. Optional Extension (Higher Rigor):

    Students evaluate how overstating or understating the allowance could mislead investors and distort financial ratios.