Answer to Question #6982 in Economics of Enterprise for LaMarcus Streeter

Question #6982
2. Which of the following statements is CORRECT?

a. A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually. Such a firm will be able to keep its accounts receivable at the current level, since the 10% cash sales can be used to finance the 10% growth rate.
b. In managing a firm's accounts receivable, it is possible to increase credit sales per day yet still keep accounts receivable fairly steady, provided the firm can shorten the length of its collection period (its DSO) sufficiently.
c. Because of the costs of granting credit, it is not possible for credit sales to be more profitable than cash sales.
d. Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.
e. Other things held constant, if a firm can shorten its DSO, this will lead to a higher current ratio.
Expert's answer
Statement B is CORRECT. Accounts receivable represents money owed by entities to
the firm on the sale of products or services on credit. Booking a receivable is
accomplished by a simple accounting transaction; however, the process of
maintaining and collecting payments on the accounts receivable subsidiary
account balances can be a full-time proposition. Depending on the industry in
practice, accounts receivable payments can be received up to 10 – 15 days after
the due date has been reached. These types of payment practices are sometimes
developed by industry standards, corporate policy, or because of the financial
condition of the client.

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