Question

Which of the following statements is true regarding sales returns and allowances?

Multiple Choice

• Estimated sales returns and allowances are often material in relation to accounts receivable.

• The sales returns and allowances account is a contra-asset account.

• Ignoring estimated future returns and allowances has a minimal impact on reported earnings when the amount of actual returns and allowances is not material and does not vary greatly from year-to-year.

• When sales returns occur, they should be debited to the sales account.

Answer 1

Correct Option C :Ignoring estimated future returns and allowances has a minimal impact on reported earnings when the amount of actual returns and allowances is not material and does not vary greatly from year-to-year.

Why other options are incorrect:

Option A i.e. Estimated sales returns and allowances are not often material in relation to accounts receivable.

Option B i.e. The sales returns and allowances account is a contra-revenue account.

Option D i.e. When sales returns occur, they should be debited to the sales returns and allowances account.