U2 Ltd is considering whether to offer trade credit to A1 Ltd. The ratio from A1's accounts that will be most useful in assessing the firm's ability to repay its trade debts on time is the:
A) gearing.
B) average settlement period for trade payables.
C) interest cover.
D) asset turnover period.

Question

Quizplus · Accepted Answer

The average settlement period for trade payables is the most useful ratio as it indicates how long A1 Ltd is taking to pay its trade debts. If this period is long, it may indicate that the firm is having difficulty generating enough cash to pay its suppliers on time, which could be a red flag for U2 Ltd when considering whether to offer trade credit. The other ratios (gearing, interest cover, and asset turnover period) do not directly relate to A1 Ltd's ability to repay its trade debts on time.

U2 Ltd Is Considering Whether to Offer Trade Credit to A1