Multiple Choice
When a customer uses a credit or debit card to make a purchase, how are the resulting amounts typically classified on the seller's balance sheet?
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7. Receivables and Investments
Types of Receivables
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Which of the following is a benefit of accounts receivable insurance policies?
A
They increase the face value of receivables on the balance sheet.
B
They eliminate the need to record bad debt expense.
C
They guarantee immediate cash collection from all customers.
D
They protect businesses against losses from customer non-payment.
Verified step by step guidance1
Understand the concept of accounts receivable insurance: Accounts receivable insurance is a policy that protects businesses from losses due to customer non-payment. It ensures that businesses are compensated for unpaid invoices, reducing financial risk.
Analyze the options provided in the question: Evaluate each statement to determine whether it aligns with the purpose of accounts receivable insurance.
Option 1: 'They increase the face value of receivables on the balance sheet.' This is incorrect because accounts receivable insurance does not affect the valuation of receivables on the balance sheet; it only provides protection against non-payment.
Option 2: 'They eliminate the need to record bad debt expense.' This is incorrect because businesses still need to record bad debt expense as part of their accounting process, even if they have insurance to cover losses.
Option 3: 'They guarantee immediate cash collection from all customers.' This is incorrect because accounts receivable insurance does not guarantee immediate cash collection; it only compensates for losses due to non-payment. The correct answer is: 'They protect businesses against losses from customer non-payment.'
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