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An increase in the provision for doubtful debts would result in ________ in working capital and _______ in net profit:
- a)Increase, Decrease
- b)Increase, Increase
- c)Decrease, Increase
- d)none
Correct answer is option 'C'. Can you explain this answer?
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Most Upvoted Answer
An increase in the provision for doubtful debts would result in ______...
Increase in provision for doubtful debts and its impact on working capital and net profit
Impact on working capital:
- Provision for doubtful debts is a contra asset account, which means that it reduces the value of accounts receivable.
- When the provision for doubtful debts is increased, it means that there is a higher likelihood of some customers not paying their debts.
- This results in a decrease in the value of accounts receivable, which in turn reduces the working capital.
- Therefore, an increase in the provision for doubtful debts would result in a decrease in working capital.
Impact on net profit:
- Provision for doubtful debts is an expense that is charged to the income statement.
- When the provision for doubtful debts is increased, it means that the company expects to incur a higher amount of bad debts in the future.
- This results in an increase in the expense, which reduces the net profit.
- Therefore, an increase in the provision for doubtful debts would result in a decrease in net profit.
Conclusion:
- An increase in the provision for doubtful debts has a negative impact on both working capital and net profit.
- It reduces the value of accounts receivable, which in turn reduces the working capital.
- It also increases the expense, which reduces the net profit.
Impact on working capital:
- Provision for doubtful debts is a contra asset account, which means that it reduces the value of accounts receivable.
- When the provision for doubtful debts is increased, it means that there is a higher likelihood of some customers not paying their debts.
- This results in a decrease in the value of accounts receivable, which in turn reduces the working capital.
- Therefore, an increase in the provision for doubtful debts would result in a decrease in working capital.
Impact on net profit:
- Provision for doubtful debts is an expense that is charged to the income statement.
- When the provision for doubtful debts is increased, it means that the company expects to incur a higher amount of bad debts in the future.
- This results in an increase in the expense, which reduces the net profit.
- Therefore, an increase in the provision for doubtful debts would result in a decrease in net profit.
Conclusion:
- An increase in the provision for doubtful debts has a negative impact on both working capital and net profit.
- It reduces the value of accounts receivable, which in turn reduces the working capital.
- It also increases the expense, which reduces the net profit.
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Community Answer
An increase in the provision for doubtful debts would result in ______...
When there is increase in provision for bad and doubtful debt then our credit side of profit and loss account will increase so there will be increase in net profit then there will be decrease in our sundry debtors which is a part of our working capital so there will be decrease in working capital
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An increase in the provision for doubtful debts would result in ________ in working capital and _______ in net profit:a)Increase, Decreaseb)Increase, Increasec)Decrease, Increased)noneCorrect answer is option 'C'. Can you explain this answer?
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