chap 10 trade receivables

Question 1

define the term ‘trade receivables’.

Answer 1

trade receivables refer to the amounts owed by customers who buy goods and services from businesses on credit

Question 2

expl why business grant credit to customers

Answer 2

a business grants credit to its customers to encourage customers to buy goods and services from it so that they will be able to receive the goods and services from the business first and pay later. The busniness will usually grant 30 to 90 days of credit period to its customers.

Question 3

expl the term allowance for impairment of trade receivables

Answer 3

allowance for impairment of trade receivables refers to the estimate amount of trade receivables that is likely to be uncollectible in the future.

Question 4

expl the term ‘impairment loss on trade receivables’.

Answer 4

impairment loss on trade receivables refers to the change in allowance for impairment of trade receivables

Question 5

state ways a business can do to reduce the potenial risk associated with selling to customers on credit term

Answer 5

-improving on the credit granting processes by ensuring credit is granted to customers who are financially able.
-offer cash discounts to encourage credit customers to pay promptly
-charge interest on overdue accounts

Question 6

state factors that a business can consider when assessing creditworthiness of credit customers

Answer 6

-reputation of customer
-customers’ history of repayment
-economic outlook
-specific industry outlook

Question 7

using an appropriate accounting theory, explain why it is necessary for a business to provide for allowance of impairment loss of trade receivables

Answer 7

the prudence theory states that assets and profits should not be overstated, while liabilities and losses should not be understated.
At the end of each period, business will review the trade receivables balance to estimate the amount of debts likely to be uncollectible. this amount is shown as an allowance for impairment of trade receivables to be deducted from the book value of trade receivables.
this is to ensure that trade receivables balance is not overstated and reflects the net amount that is collectible

Question 8

using an appropriate accounting theory, explain why it is necessary for a business to account for impairment loss on trade receivables

Answer 8

according to the matching theory, expenses incurred must be matched against the income earned in the same period to determine the profit for that period. Hence the business will record the change in the allowance as impairment loss on trade receivable (expense) in the same financial period as credit sales (income) was earned to determine the profit for the period.