Ethical issues in accounting for uncollectible accounts. Sage Department Stores operates a chain of department stores throughout the United States. It provides its customers with credit cards, both to stimulate sales and to save fees the firm would otherwise incur if customers used third-party credit cards. Sage Department Stores uses the percentage-of-sales procedure to estimate the amount of bad debt expense each period. That percentage has ranged from 2.5 to 3.2 percent in recent years. It also periodically ages its account receivable to assess the reasonable- ness of the balance in the Allowance for Uncollectibles Accounts account. Recession conditions in the economy during the current period caused Sage Department Stores and most of its competitors to operate at a net loss. Sage Department Stores increased its provision for estimated uncollectibles during the current year to 5 percent of sales. Although the increased provision resulted in a still larger net loss than it would have reported if it had used its usual percentage, security analysts did not seem to notice. The chief financial officer was prepared, however, to defend the higher percentage on the grounds that one might expect recession conditions to lead to more uncollectible accounts. Further, the chief financial officer reasoned that the firm could take a much smaller provision during the nexl few years if the higher level of uncollectihlcs did not materialize, which would increase future earnings and show even more earnings growth.
The chief financial officer also reasoned that competitors were likely to pla\ this earnings game.
To remain competitive. Sage Department Stores must play it as well. Discuss any ethical issues that you see confronting the chief financial officer of Sage Department Stores.