CA Intermediate · Financial Management and Strategic Management · Management of Receivables
Which of the following best describes the 'collection period' component of the credit policy of a firm managing its trade receivables?
The credit period is the maximum time a customer is allowed to pay after the invoice date. It is a core element of credit policy, distinct from discounts, bad debt estimates or interest on overdue amounts, and it directly affects the level of receivables carried.
- AThe maximum time allowed to a customer to pay after the invoice dateCorrect
- BThe minimum amount of purchase a customer must make to get a discount
- CThe percentage of credit sales expected to become bad debts
- DThe rate of interest charged on overdue balances of customers
Explanation
Credit period is the length of time customers are allowed to pay after the invoice date. The other options describe a purchase threshold, bad debt rate and penal interest, which are different elements of credit policy.
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