Which of the following activities will increase profits?
Answer Details
A reduction in provision for doubtful debts will increase profits.
When a business sells goods or services on credit, there is always a risk that some customers may not pay their debts. To account for this risk, businesses make a provision for doubtful debts in their financial statements.
If a business reduces its provision for doubtful debts, it is effectively saying that it expects to receive more payments from its customers. This means that the amount of bad debts (i.e., debts that are not paid) will be lower, which will result in higher profits.
Depreciation charges, undervalued closing stock, and returns inwards are all activities that can reduce profits. Depreciation is a non-cash expense that reduces the value of assets over time, undervalued closing stock means that the value of the closing stock has been understated, and returns inwards represent a decrease in sales revenue.
Therefore, out of the options given, only a reduction in provision for doubtful debts will increase profits.