Why are estimates necessary in accounting for receivables

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CompuCredit is a credit card issuer in Atlanta. It prides itself on mak- ing credit cards available to almost anyone in a matter of seconds over the Internet. The cost to the consumer is an interest rate of 28 percent, about double that of companies that provide cards only to customers with good credit. Despite its high interest rate, CompuCredit was successful for many years. To calculate its income, the company esti- mated that 10 percent of its $1.3 billion in accounts receivable would not be paid; the industry average is 7 percent. Some analysts were critical of CompuCredit for being too optimistic in its projections of losses.14 In fact, during the recent recession, CompuCredit losses from uncollectible accounts increased and exceeded its interest income and the company reported large operating losses.15 Why are estimates necessary in accounting for receivables? If CompuCredit were to use the same estimate of losses as other companies in its industry, would it have been better or worse off? How would one determine if CompuCredit's estimate of losses is reasonable?

Reference no: EM13914616

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