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CS Executive · Corporate Accounting and Financial Management · Working Capital Management

Which of the following is a likely consequence of a firm relaxing its credit standards to extend credit to customers with a weaker credit record?

Relaxing credit standards typically raises sales but also increases bad debt losses, collection costs and the investment in receivables, since riskier customers pay later or default. Lower bad debts and shorter collection periods are the effects of tightening credit standards.

  1. ALower bad debt losses and a lower collection period
  2. BHigher sales, but higher bad debts and a larger investment in receivablesCorrect
  3. CLower sales and a smaller investment in receivables
  4. DNo change in bad debts but a shorter collection period

Explanation

Relaxing credit standards admits riskier customers. Sales usually rise, but bad debts, collection costs and the funds blocked in receivables also rise. The other options describe tightening or an inconsistent result.

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