Which of the following statements is CORRECT? Please explain your answer. a. A f

Question

Which of the following statements is CORRECT? Please explain your answer.
a. A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually. Such a firm will be able to keep its accounts receivable at the current level, since the 10% cash sales can be used to finance the 10% growth rate.
b. In managing a firm's accounts receivable, it is possible to increase credit sales per day yet still keep accounts receivable fairly steady, provided the firm can shorten the length of its collection period (its DSO) sufficiently.
c. Because of the costs of granting credit, it is not possible for credit sales to be more profitable than cash sales.
d. Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.
e. Other things held constant, if a firm can shorten its DSO, this will lead to a higher current ratio.

Explanation / Answer

B) In managing a firm's accounts receivable, it is possible to increase credit sales per day yet still keep accounts receivable fairly steady, provided the firm can shorten the length of its collection period (its DSO) sufficiently. The objective of Receivable management is to avoid the situation of excessive and inadequate receivables and to determine and maintain optimum level of receivables after achieving a tradeoff between the profitability and liquidity so as to maximize the wealth of the company as a whole. The firm can increase its credit sales to create new customers and to retain the old customers if it is in a position to recover the collections from the old customers and this will help them to maintain the existing market share.

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