If a firm is contemplating a relaxation of its credit standards,which of the following might be expected to result?

Question

Quizplus · Accepted Answer

If a firm relaxes its credit standards, it is likely to increase its investment in accounts receivable by extending credit to more customers or by allowing existing customers to purchase more on credit. This can potentially lead to an increase in sales, but it also increases the risk of bad debts. Factors such as increased defaults and increased administrative costs associated with managing a larger receivables portfolio can result in decreased contribution margin and increased bad debt expense. However, since the question specifically asks for the result of the relaxation of credit standards, the most likely answer is an increase in investment in accounts receivable.

If a Firm Is Contemplating a Relaxation of Its Credit