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    Question

    An increase in the credit period allowed to debtors will

    likely:
    A Improve the cash conversion cycle Correct Answer Incorrect Answer
    B Reduce the working capital requirement Correct Answer Incorrect Answer
    C Increase the risk of bad debts Correct Answer Incorrect Answer
    D Decrease sales Correct Answer Incorrect Answer
    E Reduce the collection effort Correct Answer Incorrect Answer

    Solution

    A longer credit period means money remains tied up in receivables for a longer time, which lengthens the cash conversion cycle (A is wrong) and increases the working capital requirement (B is wrong). It also increases the probability that some customers will default on their payments, thereby increasing the risk of bad debts.

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