What is the major problem associated with selling goods or services on credit?

• A. The risk of uncollectible accounts (bad debts)
• B. Increased cash flow from immediate payments
• C. Higher inventory turnover
• D. Reduced need for accounts receivable management

Answer: (A)

Verified step by step guidance

1. Understand the concept of selling goods or services on credit: This involves allowing customers to purchase now and pay later, creating accounts receivable for the business.
2. Identify the major problem associated with credit sales: The risk of uncollectible accounts (bad debts), which occurs when customers fail to pay their outstanding balances.
3. Explain why bad debts are a concern: Uncollectible accounts reduce the company's revenue and profitability, as the expected cash inflow from credit sales is not realized.
4. Discuss the impact on financial statements: Bad debts must be accounted for, typically through an allowance for doubtful accounts, which affects both the income statement and balance sheet.
5. Highlight the importance of accounts receivable management: Effective management practices, such as credit checks and collection efforts, can mitigate the risk of bad debts and ensure healthier cash flow.