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Multiple Choice
Which action should a company take in order to minimize losses due to bad debts?
A
Recognize bad debt expense only when accounts are written off
B
Establish a rigorous credit approval process for customers
C
Increase the sales discount offered to customers
D
Delay the recording of receivables until cash is received
Verified step by step guidance
1
Understand the concept of bad debts: Bad debts occur when customers fail to pay the amounts they owe to the company, leading to financial losses. Minimizing bad debts is crucial for maintaining healthy cash flow and profitability.
Evaluate the options provided: Analyze each action mentioned in the problem to determine its effectiveness in minimizing bad debts. For example, recognizing bad debt expense only when accounts are written off does not prevent bad debts; it merely records them after they occur.
Focus on preventive measures: Establishing a rigorous credit approval process for customers is a proactive approach. By carefully assessing the creditworthiness of customers before extending credit, the company can reduce the likelihood of bad debts.
Consider the impact of sales discounts: Increasing sales discounts may encourage faster payments but does not directly address the issue of bad debts. It is more of a strategy to improve cash flow rather than prevent losses from uncollectible accounts.
Understand the timing of receivables recording: Delaying the recording of receivables until cash is received is not a practical solution, as it contradicts the accrual basis of accounting. Receivables should be recorded when the revenue is earned, regardless of when cash is received.