Table 15.6
A breakdown of Teffan, Inc.'s outstanding accounts receivable dated June 30, 2003 on the basis of the month in which the credit sale was initially made follows. The firm extends 30-day credit terms.
-An increase in accounts receivable turnover due to an increase in collection efforts will
A) decrease the firm's marginal investments in accounts receivable.
B) increase the firm's marginal investments in accounts receivable.
C) decrease the firm's collection expense.
D) increase the firm's bad debt expense.

Question

Table 15.6
A breakdown of Teffan, Inc.'s outstanding accounts receivable dated June 30, 2003 on the basis of the month in which the credit sale was initially made follows. The firm extends 30-day credit terms. 
-An increase in accounts receivable turnover due to an increase in collection efforts will
A) decrease the firm's marginal investments in accounts receivable. 
B) increase the firm's marginal investments in accounts receivable. 
C) decrease the firm's collection expense. 
D) increase the firm's bad debt expense.

Quizplus · Accepted Answer

An increase in accounts receivable turnover implies a decrease in the number of days the firm takes to collect its outstanding receivables. This could be achieved through more aggressive collection efforts, which would decrease the firm's marginal investments in accounts receivable (i.e., the amount of resources tied up in funding credit sales). A higher turnover would also decrease the firm's collection expense, as it would require fewer resources to pursue delinquent customers. However, an increase in accounts receivable turnover should not lead to an increase in bad debt expense, as this refers to losses incurred due to customers' failure to pay their debts and should not be impacted by collection efforts.

Table 15.6 A Breakdown of Teffan, Inc.'s Outstanding Accounts Receivable Dated June