the % of ar method first estimates which of the following?
The % of AR method, also known as the percentage of accounts receivable method, is a financial analysis tool used to estimate the collectability of accounts receivable and calculate the allowance for doubtful accounts. This method provides an estimate of the percentage of accounts receivable that may not be collected.
The % of AR method first estimates the amount of uncollectible accounts receivable. It helps businesses determine the allowance for doubtful accounts, which is a contra asset account reported on the balance sheet to reflect the estimated amount of bad debts. By estimating the uncollectible portion of accounts receivable, companies can more accurately report their financial statements and assess their overall financial health.
This method is typically used by businesses to assess the risk of non-payment by their customers and to evaluate their credit policies. It involves analyzing historical data, industry trends, and the company’s specific circumstances to determine an appropriate percentage for estimating uncollectible accounts.
It is important to note that the % of AR method is just an estimate and may not accurately reflect the actual bad debts incurred by a company. It is always recommended for businesses to regularly review and update their allowance for doubtful accounts based on changing economic conditions and customer payment behavior.