A company has operating income of $100,000 before the estimate of uncollectible accounts. Also, assume management estimates uncollectible accounts to be $6,000, or 2% of net sales of $300,000. However, the fact that uncollectible accounts will be $6,000 is not always so clear. Assume that for the past five years, average uncollectible accounts costs on the same level of sales have ranged from $4,000 to $8,000 (1.33% to 3.67% of net sales) with no specific pattern being apparent. A financial manager who wanted to report the highest possible current period income would be justified in using the $4,000 amount for the current year’s expense estimate even though $4,000 is the bottom of the historical range. That same manager might use $8,000 to be conservative in a year when the economy is weak.
