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Dear Tutor,
1. An increase in an allowance for receivables of 8000 has been treated as a reduction in the allowance in the financial statements. Which of the following explains the resulting effects?
Ans: Net profit overstaed by 16000, receivables overstated by 16000Could you pelase help me to explain the above question?
Thanks.Increasing the allowance should be shown as an expense in the income statement, which means less profit.
However they have treated it as if it was a reduction in the allowance and so they will have shown it as a negative expense resulting in more profit.
So……their profit is 8000 higher when it should be 8000 lower. This means that the profit they are showing is 16000 more than it actually should be – i.e. overstated.
Similarly the receivables figure in the SOFP should be after subtracting the allowance and since they have reduced it instead of increasing it, they are subtracting an allowance which is 16000 less than it should have been. This means that the final receivables figure is 16000 more that it should be (i.e. overstated).
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