Reducing bad debt provision boosts assets and profit

Steps:

• Provision for irrecoverable debts subtracts from trade debtors, reducing current assets.
• Lowering the provision rate increases net debtors, raising current assets.
• Current ratio (current assets ÷ current liabilities) improves due to higher numerator.
• Reduced provision expense lowers total expenses, increasing net profit and profit margin (net profit ÷ sales).

Why B is correct:

• Current ratio rises from higher current assets; profit margin rises from lower expense per the income statement formula, affecting both 1 and 3.

Why the others are wrong:

• A: Gross margin (gross profit ÷ sales) unaffected, as provisions are operating expenses post-gross profit.
• C: Excludes current ratio, which increases from asset adjustment.
• D: Excludes current ratio, ignoring balance sheet impact on liquidity.

Final answer: B