Final answer:
The primary focus of problem 7-4a in accounting on accounts receivable transactions and bad debts adjustments is bad debts management. It involves estimating uncollectible receivables and adjusting the accounts to represent the true value, impacting the accuracy of the financial statements. The discussion also touches on bank balance sheets and factors affecting the purchase of loans in the secondary market.
Step-by-step explanation:
In problem 7-4a (static) accounting, which involves accounts receivable transactions and bad debts adjustments, the primary focus is on bad debts management. This entails estimating the amount of accounts receivable that may not be collectible and adjusting the accounts to reflect this.
The goal is to accurately report the net realizable value of the accounts receivable on the balance sheet and to match bad debt expenses with associated revenues.
Correct accounting for bad debts is crucial as it affects the financial statements' accuracy and the assessment of a company's financial health.
When it comes to the money listed under assets on a bank balance sheet may not actually be in the bank because banks operate on the fractional reserve banking system, which means they are required to hold only a fraction of deposits on hand as reserves.
The rest of the funds are utilized for loans and investments, which are also considered assets. That is why the actual cash reserve is often less than the total assets listed.
Regarding the purchase of loans in the secondary market, you would pay less for a loan if the borrower has been late on payments due to increased risk, and potentially more if the interest rates have fallen since the loan was issued as the loan now has a higher relative value.
Conversely, you might pay more for a loan if the borrower, particularly a firm, has just declared high profits, indicating a lower risk of default.