CFA Practice Question

There are 90 practice questions for this study session.

CFA Practice Question

Durable Flooring Co. extended the collection terms of its customers' accounts from 30 days to 45 days. Which one of the following describes what is most likely to happen to the balances in sales and accounts receivable?

A. Sales and accounts receivable will increase at the same rate.
B. The accounts receivable balance will grow faster than sales.
C. Sales will grow faster than the accounts receivable balance.
Correct Answer: B

When a company loosens customer payment terms, the accounts receivable balance typically grows at a much faster rate than sales.

User Contributed Comments 3

User Comment
kalps if you extend more credit to customers then the accounts receivable balance will grow and grow and grow think about it like this - if you never ever collect money from customers then the A/R account will always be larger than sales account if sales are reset at the end of the accounting period.
shasha ok, kalps, you mentioned the balance of A/R could be much larger than the reset revenue when next financial year begins. however, the question here is about "Speed" rather than any balance figure. i believe the question failed to be addressed properly. I guess it expected thinking and answer like yours actually, but in a confused way.
Gina i think the rationale goes like: when you tighten credit, you lose some customers. the reverse is true as well. when you loosen credit, you'll get more customers and sales will grow. when you give them more time to pay, the relative growth rate is higher in AR compared to sales. because some people pay cash, and the extension makes no difference for them.or simply: any additional business will be A/R business, hence % of A/R grows faster than sales.
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