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CA Intermediate · Financial Management and Strategic Management · Management of Receivables

Which of the following best describes the 'collection policy' of a firm in the context of management of receivables?

Collection policy is the set of procedures a firm follows to recover dues from customers, especially when payments are overdue. It differs from credit terms, cash discounts and credit standards, which deal with the credit period, early-payment incentives and customer eligibility respectively.

  1. AThe set of procedures followed to collect dues from customers after the credit period has expired or when payments become overdueCorrect
  2. BThe maximum period for which goods are sold on credit to customers
  3. CThe percentage discount given to customers for early payment
  4. DThe standards used to decide the minimum creditworthiness of a customer

Explanation

Collection policy refers to the procedures a firm uses to collect amounts from customers, particularly overdue accounts. The length of the credit period is part of credit terms, the discount is a cash discount term, and creditworthiness standards form the credit standards.

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