Due to competitive pressures, Gertup has had to increase credit terms to customers to maintain sales. This resulted in Gertup's accounts receivable doubling from 12/31/04 to 12/31/05. The average accounts receivable turnover was 30 days. Without the increased credit terms accounts receivable turnover would have remained at 12/31/04 levels. The impact of the change in credit policy was:
A) None as sales remained the same
B) Decrease liquidity, and decrease available cash
C) Increased current ratio and liquidity of the company
D) Current ratio stayed the same and liquidity remained constant

Question

Quizplus · Accepted Answer

Doubling of accounts receivable due to increased credit terms indicates that customers are taking longer to pay their bills. This results in decreased liquidity as the cash that is owed to the company is tied up in accounts receivable. The longer payment time can further strain available cash and liquidity.

Due to Competitive Pressures, Gertup Has Had to Increase Credit