1st Edition

ISBN: 9780132162302

Author: Elizabeth A. Gordon, Jana S. Raedy, Alexander J. Sannella

Publisher: PEARSON

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Textbook Question

Chapter 3, Problem 3.2E

Cognitive Bias. A team of accounting students is working on a case where they are required to assess a set of information to determine a company’s allowance for bad debts. The students have many pieces of information to analyze, including

The company’s allowance for bad debts has been 5% of its receivables for the last several years

This year, the company has strengthened its credit extension policy.

The average time that an accounts receivable has been outstanding has increased from 40 to 50 days this year.

The economy has weakened over the year, with a pending recession.

Following is part of the discussion at their first team meeting. Analyze the discussion and determine the type of cognitive bias most consistent with the statements made by each student, providing an explanation for your answer.

Discussion

Tom initiated the discussion saying, “I have seen this kind of situation before when a company has to report a higher allowance than last year. Allowances are always increasing.”

Jennifer offered. “The first piece of information in the case is always the most important.

The bad debts have historically been 5%. Therefore, the allowance has to be 5%.”

Jake added, “As I look at the case, I keep coming back to the fact that the average time that an account receivable has been outstanding has increased by 10 days. In my view, this is the most important piece of information—the other facts don’t matter.”

Manna’s view was, “Even though the economy has deteriorated, the historical data is always more important. The general trends in the economy are not relevant.”

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Chapter 3, Problem 3.1E

Chapter 3, Problem 3.3E

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Chapter 3 Solutions

Intermediate Accounting

Ch. 3 - Prob. 3.1Q Ch. 3 - Prob. 3.2Q Ch. 3 - Does U.S. GAAP require that companies disclose...Ch. 3 - Does IFRS require that companies disclose...Ch. 3 - Prob. 3.5Q Ch. 3 - Does IFRS require that companies disclose their...Ch. 3 - Prob. 3.7Q Ch. 3 - Prob. 3.8Q Ch. 3 - Prob. 3.9Q Ch. 3 - Prob. 3.10Q

Ch. 3 - Prob. 3.11Q Ch. 3 - What is the Basis for Conclusions and where can...Ch. 3 - Prob. 3.13Q Ch. 3 - Prob. 3.14Q Ch. 3 - Prob. 3.1BE Ch. 3 - Judgment in Accounting for Plant and Equipment....Ch. 3 - Match Each Cognitive Bias Below with its...Ch. 3 - Prob. 3.4BE Ch. 3 - Prob. 3.5BE Ch. 3 - Prob. 3.6BE Ch. 3 - Prob. 3.7BE Ch. 3 - Codification Research. Referencing Appendix A,...Ch. 3 - Prob. 3.9BE Ch. 3 - Prob. 3.10BE Ch. 3 - Exercises E3-1. Accounting Policy Disclosures. To...Ch. 3 - Cognitive Bias. A team of accounting students is...Ch. 3 - Cognitive Bias. A team of accounting students is...Ch. 3 - Authoritative Literature. Provide the reference to...Ch. 3 - Authoritative Literature. Provide the reference to...Ch. 3 - Authoritative Literature. To what entity types...Ch. 3 - Prob. 3.7E Ch. 3 - Prob. 3.8E Ch. 3 - Prob. 1JC Ch. 3 - Prob. 2JC Ch. 3 - Prob. 1SSC Ch. 3 - Prob. 2SSC Ch. 3 - Basis for Conclusions Case 1: Judgment and...Ch. 3 - Basis for Conclusions Case 2: Income Statement or...

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Solution Summary: The author explains the types of cognitive biases that individual decision makers subject to when exercising judgment in addressing accounting issues.

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