Question

1. Easing credit standards or who qualifies for credit should cause credit sales to:

a. Increase      b. Decrease     c. No change

2. The Additional Sales associated with easing credit standards when calculating profit margin is based on:

a. Average Cost     b. Average fixed Cost       c. Average Variable Cost

3. All credit sales customers will take the credit discount.

a. True     b. False

Answer 1

Solution:

Credit standards are the set or the combination of some standards which are generally drafted by the company on the basis of which it decides whether to grant the credit or loan to a borrower or whether to make the sales to a particular dealer on credit basis or not.

These standards vary from entity to entity depending on the nature of the business. But the general standards remains the same in all the entities like the borrower or the dealer’s history of making the payment or whether he is regular in making the payments on time or not, any credit ratings, if allotted by any database if maintained that contains the list of all credit borrowing agencies, evaluation of the credit periods, level of seriousness of doing business, in case of any loan, planning for the repayment of the same, nature of security furnished at the time of applying for the loan, etc.

Relaxing the credit standards means the company is increasing its average collection period in case of credit sales, ignoring the amount of bad debts to some extent, granting the loan to the relatives or to the other person without evaluating the creditworthiness of such person etc.

Relaxing the credit standards from the viewpoint of the credit sales will increase the sales on credit as the company will more focus on the figure of the turnover amount irrespective of its collection period or evaluation of the bad debts incurred in the past from such dealer.