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Basic Question 20 of 22
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?
B. The accounts receivable balance will grow faster than sales.
C. Sales will grow faster than the accounts receivable balance.
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.
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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Learning Outcome Statements
describe presentation choices, including non-GAAP measures, that could be used to influence an analyst's opinion
describe accounting methods (choices and estimates) that could be used to manage earnings, cash flow, and balance sheet items
describe accounting warning signs and methods for detecting manipulation of information in financial reports
CFA® 2024 Level I Curriculum, Volume 3, Module 10.