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Question

A decrease in the provision for doubtful debts would result in :

A An increase in liabilities Correct Answer Incorrect Answer
B A decrease in working capital. Correct Answer Incorrect Answer
C An increase in net profit Correct Answer Incorrect Answer
D No impact on net profit Correct Answer Incorrect Answer
E None of the three. Correct Answer Incorrect Answer

Solution

The provision for doubtful debts is created to account for the possibility of some customers not paying their debts in the future. If the provision is decreased, it means the company is reducing its estimate of how much money it will lose due to bad debts. This reduction in expenses will increase the net profit.

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