Question

an average collection period in excess of the industry average may indicate

a. credit terms are liberal

b. current assets are too small

c. bad debt write-offs may occur

d. collection policies are lax

e. balance sheet value of accounts receivable is overstated

Answer 1

The Correct Answer is a.credit terms are liberal

When a company makes credit sale then it allows the buyer of goods to make payment after a certain credit period. The customer or buyer makes payment within such credit period for the goods. Therefore a company would like to collect payment from its customer as soon as possible because funds of the company are blocked in credit sales.

The credit terms usually states the period within which the payment has to be made to the company for the goods. If the company allows its customer longer credit periods as compared to the industry then its average collection period will increase as the customers will enjoy longer repayment periods.

When the average collection period is in excess of the industry average collection period it may indicate that the credit terms are liberal. One of the major reasons from the viewpoint of the company to make credit terms liberal is to make more sales as the customers would prefer that seller which provides longer credit period and thus grow their business.