If easing a firm's credit policy lengthens the collection period and results in a worsening of the aging schedule, then why do firms take such actions?
A) It normally stimulates sales.
B) To meet competitive pressures.
C) To increase the firm's deferral period for payables.
D) Statements a and b are correct.
E) All of the statements above are correct.

Question

Quizplus · Accepted Answer

Easing a firm's credit policy may stimulate sales as customers may be more willing to make purchases. Additionally, firms may feel the need to match competitive pressure from other firms offering easier credit terms. However, extending the collection period may result in a worsening of the aging schedule, indicating an increase in the risk of bad debts. Overall, firms weigh the potential benefits of increased sales and competitiveness against the potential risks of bad debts and a longer collection period when deciding to ease their credit policy.

If Easing a Firm's Credit Policy Lengthens the Collection Period