Florida General Contractor Practice Exam

What does an unfavorable bad debt trend indicate?

1. Increasing profitability

2. Growing losses from uncollectible accounts

3. Improving customer relationships

4. Steady cash flow

The correct answer is: Growing losses from uncollectible accounts

An unfavorable bad debt trend indicates growing losses from uncollectible accounts. This trend signifies that a business is having difficulty collecting payments from customers, leading to an increase in accounts classified as bad debts. As the amount of uncollectible accounts rises, it suggests that the company may be extending credit too liberally or that customers' financial health is declining. This situation can ultimately erode profit margins, as the business has to write off these debts, reflecting poorly on financial health and operational efficiency. Understanding the implications of a bad debt trend is crucial for managing a company’s finances and ensuring that credit policies are appropriate for the risks being taken.