When a firm initiates or increases a cash discount, sales are expected to ________, the investment in accounts receivable is expected to ________, the bad debt expense is expected to ________, and the profit per unit is expected to ________.
A) decrease; increase; increase; increase
B) decrease; decrease; increase; increase
C) increase; increase; decrease; decrease
D) increase; decrease; decrease; decrease

Question

Quizplus · Accepted Answer

When a firm initiates or increases a cash discount, sales are expected to increase due to the incentive for customers to buy more. The investment in accounts receivable is expected to decrease because customers are encouraged to pay earlier, reducing the amount of outstanding receivables. The bad debt expense is expected to decrease as well, since earlier payments reduce the risk of defaults. Finally, the profit per unit is expected to decrease because the cash discount reduces the amount of revenue received per unit sold.

When a Firm Initiates or Increases a Cash Discount, Sales