CA Foundation Exam > CA Foundation Questions > A decrease in the provision for doubtful debt...
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A decrease in the provision for doubtful debts would result in:
- a)an increase in liabilities.
- b)a decrease in working capital.
- c)a decrease in net profit.
- d)an increase in net profit.
Correct answer is option 'D'. Can you explain this answer?
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Most Upvoted Answer
A decrease in the provision for doubtful debts would result in:a)an in...
Explanation:
Provision for doubtful debts is a provision that a company creates to cover potential losses from customers who may not pay their debts. It is an estimated amount that a company sets aside to cover the possibility of bad debts. If the provision for doubtful debts is decreased, it means that the company is expecting fewer bad debts, as a result, it will have a positive impact on the company's financial statements. Let's see how:
Impact on Liabilities:
• Decreasing the provision for doubtful debts will not have any impact on the liabilities of the company.
Impact on Working Capital:
• Working capital is the difference between current assets and current liabilities. If the provision for doubtful debts is decreased, it means that the current assets of the company will increase, which will have a positive impact on the working capital.
Impact on Net Profit:
• Decreasing the provision for doubtful debts will have a positive impact on the net profit of the company. As the provision is decreased, it means that the estimated amount of bad debts is also decreased, which will result in higher net profit.
Conclusion:
• In conclusion, a decrease in the provision for doubtful debts will have a positive impact on the company's financial statements. It will increase the current assets, improve the working capital, and increase the net profit.
Provision for doubtful debts is a provision that a company creates to cover potential losses from customers who may not pay their debts. It is an estimated amount that a company sets aside to cover the possibility of bad debts. If the provision for doubtful debts is decreased, it means that the company is expecting fewer bad debts, as a result, it will have a positive impact on the company's financial statements. Let's see how:
Impact on Liabilities:
• Decreasing the provision for doubtful debts will not have any impact on the liabilities of the company.
Impact on Working Capital:
• Working capital is the difference between current assets and current liabilities. If the provision for doubtful debts is decreased, it means that the current assets of the company will increase, which will have a positive impact on the working capital.
Impact on Net Profit:
• Decreasing the provision for doubtful debts will have a positive impact on the net profit of the company. As the provision is decreased, it means that the estimated amount of bad debts is also decreased, which will result in higher net profit.
Conclusion:
• In conclusion, a decrease in the provision for doubtful debts will have a positive impact on the company's financial statements. It will increase the current assets, improve the working capital, and increase the net profit.
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Community Answer
A decrease in the provision for doubtful debts would result in:a)an in...
PDD appears in credit side of P&L a/c. This will decrease the debit balance. Eventually increasing net profit.
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A decrease in the provision for doubtful debts would result in:a)an increase in liabilities.b)a decrease in working capital.c)a decrease in net profit.d)an increase in net profit.Correct answer is option 'D'. Can you explain this answer?
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