[amp_mcq option1=”It will increase net income” option2=”It will decrease net income” option3=”No effect” option4=”It will increase gross profit and net income” correct=”option1″]
The correct answer is A. It will increase net income.
A provision for bad debts is an estimate of the amount of accounts receivable that are likely to be uncollectible. When a business decreases its provision for bad debts, it is essentially saying that it believes that it will be able to collect more of its accounts receivable than it previously thought. This will increase net income because it will reduce the amount of bad debt expense that is recorded.
Here is a more detailed explanation of each option:
- Option A: It will increase net income. This is the correct answer because a decrease in the provision for bad debts will reduce the amount of bad debt expense that is recorded, which will increase net income.
- Option B: It will decrease net income. This is incorrect because a decrease in the provision for bad debts will increase net income, not decrease it.
- Option C: No effect. This is incorrect because a decrease in the provision for bad debts will have an effect on net income, as explained above.
- Option D: It will increase gross profit and net income. This is incorrect because a decrease in the provision for bad debts will only affect net income, not gross profit.