Answers
Answer:
From Accounting and Ethical viewpoints, the suggestions of Jim are not acceptable. The calculations for bad debt expense and depreciation need to be based on systematic calculation , not by a thumb rule approach.
The estimate for bad debt is not always related to the credit sales volume alone. The risk rating of the customers involved, the history of payments received from the customer, the current financial condition of the cutomers and the credit rating etc needs to be validated for reaching to a conclusion regarding the estimate for bad debt expense. It does not appear that Jim has that kind of detailed calculation to back up the decison to reduce bad debt expense from 4% to 2%. Therefore reducting the estimated expense without the required reasons will not be correct from accounting point of view and also will not be ethical as the shareholders will be presented with am information which has no basis and the stakeholders will be misguided.
Similarly , depreciation estimate cannot be changed with fluctuation in sales volume.
Depreciation is a charge for the cost of the asset. Any reduction in fair value or any obsolescence may lead to revaluation of the assets downwards. But increasing life of asset due to low sales volume is not an acceptable accounting practice and is a manipulation of the accounting data. Depreciation estimate cannot be whimsically changed with fluctuating sales volume, it has to be done as per accounting norms only and with proper justification. Therefore Jim's proposal of increasing asset life is not proper from accounting angle and also not ethical as stakeholders will get misinformation regrading the profitability and EPS of the company.
It is to be remembered that any change in estimate has to be implemented prospectively with clear justification and logic that are accepted from accounting and business point of view.
Jim's proposals do not meet those criteria and should not be accepted.
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