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

Which of the following is the standard term for the cost of funds blocked in receivables, arising because the firm has to finance the credit period granted to customers?

The cost of funds blocked in receivables because of the credit period is called the carrying cost of receivables. It is the opportunity cost or financing cost of investment in debtors, unlike collection costs, which are administrative, or default costs, which are bad-debt losses.

  1. ACarrying cost of receivablesCorrect
  2. BCollection cost of receivables
  3. CDefault cost of receivables
  4. DCapacity cost of receivables

Explanation

Carrying cost is the cost of financing the amount tied up in receivables, i.e. the opportunity cost of funds invested for the credit period. Collection cost is the administrative expense of collecting dues, and default cost is the loss from bad debts. Capacity cost is not a receivables-management cost head.

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