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exam kit question

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › exam kit question

  • This topic has 1 reply, 2 voices, and was last updated 5 years ago by John Moffat.
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  • May 30, 2020 at 6:41 am #572264
    AverageAndy
    Member
    • Topics: 128
    • Replies: 34
    • ☆☆

    in an attempt to improve the liquidity position of a company, the company is considering offering an early settlement discount to its customers. which of the following would be the outcome of offering early settlement discounts?

    a-sales increase
    b-administrative costs decrease
    c-bad debts increase

    correct answer: sales increase.

    Sir my doubt is why will the administrative costs not decrease? as bad debts are a part of administrative expenses, so the fact remains that early settlement discounts would offer the customers a chance to pay early at reduced rates would lead to a reduction in bad debts and hence a lowering of admin expense, so why not option B??

    May 30, 2020 at 10:06 am #572277
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54795
    • ☆☆☆☆☆

    There will be extra costs of administering the discount. There might be a saving in bad debts, but we cannot say that any saving that there will be in bad debts would be greater than the costs of administering the offering of the discount – we do not know.

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