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CMA Intermediate · Financial Management and Business Data Analytics · Receivable Management

Which of the following changes in a firm's credit policy is most likely to INCREASE both sales volume and the level of bad debts, other things remaining the same?

Relaxing credit standards raises both sales and bad debts, because customers with weaker creditworthiness are accepted. They buy more on credit, but they are more likely to default. Tightening standards, shortening credit periods or withdrawing discounts moves the firm toward lower sales and lower bad debts.

  1. ARaising the minimum credit rating required of customers
  2. BRelaxing credit standards to admit customers with weaker creditworthinessCorrect
  3. CReducing the credit period from 45 days to 30 days
  4. DWithdrawing the cash discount for early payment

Explanation

Relaxing credit standards admits more marginal customers. Sales rise because more buyers qualify, but the probability of default also rises, so bad debts increase. The other options tighten policy and generally reduce sales and bad debts.

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