Multiple Choice
Which of the following is classified as a trade receivable?
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7. Receivables and Investments
Types of Receivables
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Which of the following is a common reason for the cancellation of an accounts receivable?
A
The company receives a new purchase order from the customer.
B
The customer is unable to pay due to bankruptcy.
C
The company increases the credit limit for the customer.
D
The customer requests an extension of payment terms.
Verified step by step guidance1
Understand the concept of accounts receivable: Accounts receivable represents the money owed to a company by its customers for goods or services delivered on credit.
Identify the reasons for cancellation of accounts receivable: Cancellation typically occurs when the company determines that the receivable is uncollectible, such as in cases of customer bankruptcy or other financial difficulties.
Analyze the options provided: Evaluate each option to determine if it aligns with the concept of uncollectible accounts receivable.
Option 1: Receiving a new purchase order does not affect the existing accounts receivable balance; it simply creates a new transaction.
Option 2: If the customer is unable to pay due to bankruptcy, the company may cancel the accounts receivable as it is deemed uncollectible. This aligns with the concept of bad debt write-off.
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