The accounts receivable approach to credit policy supports the theory that:
A) a firm's risk of offering credit to a new customer is limited to the cost of the items sold.
B) the best credit policy is an all-cash policy.
C) the cost of offering credit to a new customer is the same as the cost of offering credit to an existing customer.
D) increasing receivables guarantees increasing profits.
E) the default risk of a credit policy is the same as the default risk under an all cash-policy if your customers remain the same.

Question

Quizplus · Accepted Answer

The accounts receivable approach to credit policy suggests that the primary risk a firm faces when offering credit to a new customer is the cost of the goods sold to that customer. If the customer fails to pay, the firm loses the cost of the items sold but not necessarily more than that, assuming it does not incur additional costs in attempting to collect the debt. This approach does not imply that receivables always lead to increased profits (D), that the cost of offering credit is the same for new and existing customers (C), that an all-cash policy is best (B), or that the default risk is the same under all policies (E).

The Accounts Receivable Approach to Credit Policy Supports the Theory