Which one of these statements is correct?
A) A firm's cash cycle generally decreases when it switches from a cash to a credit policy, all else equal.
B) Most customers will forgo the discount and pay at the end of the credit period.
C) Total revenues generally decrease if both the quantity sold and the price per unit increase when credit is granted.
D) Only the cost of default should be considered before granting credit.
E) A firm may have to increase its long-term borrowing if it decides to grant credit to its customers.

Question

Quizplus · Accepted Answer

Granting credit to customers increases the firm's accounts receivable, which is an asset. This increase in assets must be financed, and the firm may have to borrow more money, increasing its long-term borrowing. Therefore, option E is the only correct statement. Option A is incorrect because switching to a credit policy will increase the firm's cash cycle. Option B is incorrect because most customers take advantage of the credit period and delay payment. Option C is incorrect because higher quantities sold and higher prices will result in higher revenues. Option D is incorrect because the cost of default is only one of the many factors to consider when granting credit.

Which One of These Statements Is Correct