Which of the following statements is incorrect?
A) An accounts receivable arises when a business sells goods or services to a third party on credit terms.
B) The absence of bad debts is an indicator that the credit policy may be too strict and can result in the loss of profits.
C) The higher the number of customer being supplied on credit and amount of inventories, the lower the working capital requirements.
D) The failure to allow for uncollectable accounts will cause the owners' equity to be overstated.

Question

Quizplus · Accepted Answer

The statement "The higher the number of customer being supplied on credit and amount of inventories, the lower the working capital requirements" is incorrect. The opposite is true - the higher the number of customers being supplied on credit and amount of inventories, the higher the working capital requirements. This is because more customers on credit means more cash tied up in accounts receivable, and more inventories mean more cash tied up in stock. Working capital is the amount of cash a company has available to cover its day-to-day operations, so if more cash is tied up in accounts receivable and inventory, the working capital requirements will be higher.

Which of the Following Statements Is Incorrect