Which of the following argues for extending credit? 1. an increase in both sales

Question

Which of the following argues for extending credit? 1. an increase in both sales and inventory turnover 2. an increase in both carrying costs and in sales 3. an increase in bad debt expense and a decrease in collection costs 4. an increase in sales and an increase in collection costs

Which of the following argues against extending credit?

2 and 3

1 and 3

2 and 4

1 and 4

Credit policy requires establishing

the minimum level of inventory

the terms of enforcement

the optimal level of inventory

the average collection period

1. increased collection expense 2. reduced collection expense 3. increased bad debt expense 4. reduced bad debt expense

Explanation / Answer

Solution:

1.

a. Factors argues for Extending credit are:

Increase in both sales and Inventory turnover ratio. Sales are ultimately topline of the business which shows the amount of goods company sold to its customer. Increase in sales will improve the profits of the compan. Similarly The Inventory turnover ratio implies the abilitof the company to convert its Inventory into sales.The more the inventory turnover ratio the better will be the liquidity position of the company. So, Both increase in profitability and liquidity will help the company to repay its debts timely.

2.

THe following factors argues against the extension of credit:

Increased Bad debt expenses and Increased collection expenses.

Bad debt expenses are the debts which are irrecoverable and company write down such expenses in the books of accounts , Also collection expenses are the recovery expenses which company incur on recovering its debts from it's debtors. So increase in such expenses, will affect the credibility of the company resulting in reluctance of lender in extending credit.

3.

Credit Policy requires establishing:

d. Average collection period:

It refers to the number of days between The Sale and the Cash recovered from such sale. So lesser the Average collection period better will the liquidity position of the company. And In case of vice-versa company will take more time to recover its cashwhich will impact its debt paying capacity. So, While framing credit policy the Lender must take into account , The average collection period

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.