Multiple Choice
Which type of receivable is most likely to arise when a disability policyowner is injured and becomes totally disabled, and the insurance company owes them future benefit payments?
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7. Receivables and Investments
Types of Receivables
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Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
Which term refers to the maximum outstanding balance allowed to a customer by a vendor?
A
Allowance for doubtful accounts
B
Notes receivable
C
Credit limit
D
Accounts receivable
Verified step by step guidance1
Understand the concept of 'Credit Limit': The credit limit is the maximum amount of credit a vendor allows a customer to have outstanding at any given time. It is a control mechanism to manage credit risk.
Differentiate between the terms provided: 'Allowance for doubtful accounts' refers to an estimate of uncollectible accounts receivable, 'Notes receivable' refers to written promises for amounts to be received, and 'Accounts receivable' refers to amounts owed by customers for credit sales.
Recognize that 'Credit Limit' is the correct term because it directly relates to the maximum outstanding balance a vendor permits for a customer.
Understand the importance of credit limits in financial accounting: Credit limits help vendors manage their exposure to credit risk and ensure customers do not exceed their ability to repay.
Apply this knowledge in practice: When analyzing customer accounts, always check the credit limit to ensure the outstanding balance does not exceed the allowed maximum.
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