Zorro Company Has Significant Amounts of Accounts Receivable, and Experiences

question 5

Multiple Choice

Zorro Company has significant amounts of accounts receivable, and experiences bad debts from time to time. Zorro uses the direct write- off method. When Zorro Company writes off a bad debt, what is the effect of that single transaction?

• A)It will reduce profit.
• B)It will have no effect on profit.
• C)It will generate positive cash flow.
• D)It will increase total assets of the company.

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Definitions:

Stockholders' Equity

Represents the residual interest in the assets of a corporation after deducting liabilities, essentially the net assets that belong to shareholders.

Unissued Stock

Shares that have been authorized in a company's charter but have not yet been issued to investors.

Shares

Units of ownership interest in a corporation or financial asset that provide a portion of the company's profits and losses to the shareholder.

Book Value

The net value of a company's assets minus its liabilities, often used to assess the company's worth on its balance sheet.