Chpt 10

Question 1

Define trade receivables

Answer 1

Trade receivables refer to the amounts owed by the customers who buy goods and services from business on credit.

Question 2

Explain 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 business will usually grant 30 to 90 days of credit period to its customers.

Question 3

Explain 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 uncollectable in the future.

Question 4

Accounting theory for business to provide for allowance for impairment of trade receivables

Answer 4

According to prudence theory ….. Thus, at the end of each period, business will review the trade receivables balance to estimate the amount of debts likely to be uncollectable and show it is as allowance for impairment of trade receivables to be deducted against 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 5

Explain impairment loss on trade receivables

Answer 5

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

Question 6

Accounting theory for accounting for impairment loss on trade receivables

Answer 6

According to the matching theory, …… Hence the business will record the change in allowance as impairment loss on trade receivables in the same financial period as credit salles was earned to determine the profit for the period.

Question 7

Ways a business can reduce the potential risk associated with selling to customers on credit term

Answer 7

• Offer cash discounts to encourage credit customers to pay promptly.
  *Charge interest on overdue accounts.

Question 8

Factors that a business can consider when assessing credit worthiness of credit customers

Answer 8

• Reputation of customer
• Customers history of repayment
• Economic outlook
• Specific industry outlook