Certified Government Financial Manager (CGFM) Practice Exam

The creation of an allowance account for uncollectible receivables under Generally Accepted Accounting Principles (GAAP) is based on the assessment of collectibility of those receivables. Specifically, the criteria that must be met involve the determination that it is probable that certain receivables will not be collected. This assessment involves analyzing past collection experiences, current economic conditions, and other relevant factors that could affect the ability to collect outstanding debts.

This approach ensures that the financial statements present a more realistic picture of the organization's financial position by recognizing potential losses before they occur. By establishing an allowance account, the organization can match revenues with the anticipated costs associated with uncollectible accounts, adhering to the matching principle of accounting. This process ultimately provides more accurate financial reporting, highlighting potential risks associated with receivables.

The other choices do not relate to the criteria necessary for creating an allowance account in the context of uncollectible receivables. For instance, selling an asset or classifying debts as current may not have a direct impact on determining the likelihood of collection. Furthermore, undergoing an annual audit is a procedural requirement for financial accountability rather than a criterion for establishing an allowance account.