CFA Practice Question

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CFA Practice Question

Which one of the following business activities would result in a more rapid growth rate in accounts receivable than in sales?

A. Customer creditworthiness is improving.
B. Revenue is recognized at the point of sale.
C. The firm ships quantities in excess of those ordered by the customer (with a right of return).
Correct Answer: C

Customers eventually probably will return unwanted (additional) products. Receivables will grow faster than sales because there will be many unpaid accounts from customers who do not intend to pay.

User Contributed Comments 7

User Comment
kalps I may sound stupid, but I read C as sending more goods but not billing for more goods. Overall this question is rubbish as A is teh right answer as if credit worthiness is better then you as a firm can extend more credit to purchasers
shasha there was a bill sent to customer for some kind of reason (booming revenue, maybe), the term "with a right of return" tells us.
vincenthuang I think from "loosen credit" way. The company want to increase sales, so give customers the right of return, therefore the A/R grows faster than sales.
polska333 also improved credit may cause existing customers to switch from cash basis to A/P without any growth in sales - A could be a answer
swt326 Improving creditworthiness means that customers are more likely to pay their credit back faster. This will decrease accounts receivable.
quanttrader C- since the amount of pay expected (Accts receivable) > amt of sales (amt ordered)
jhaverty94 I disagree with this, if a company sent a product without an agreement and with right of return, no revenue or receivables would be recorded until it is somehow clear the customer is keeping the items sent and will pay for them. This question is misleading. I also agree with kalps that A could be correct and incorrect. Its incorrect because increasing creditworthiness means customers are more likely to pay and thus less AR, on the flip side, as kalps pointed out, increasing creditworthiness could also increase AR since the company could extend credit to more customers.
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