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This addresses how credit terms affect A/R, sales & profit.

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E. Explain how each of the following actions is likely to affect each of accounts receivable, sales, and profit. In your answer, explain whether the action will increase or decrease each variable or have an indeterminate effect.

a) The firm loosens its credit standards.
b) The terms of trade are changed from 3/10, net 30 to 2/10, net 30.
c) The terms of trade are changed from 3/10, net 40 to 3/10, net 30.
d) The credit manager gets tough with past due accounts.

Please show your work to help me better understand.

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Solution Summary

The solution provides the exact calculations and explanations for how each credit term change is likely to affect each of accounts receivable, sales, and profit. Also explained is if the action will increase or decrease each variable or have an indeterminate effect.

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a. The firm loosens its credit standards:

Sales: increase due to lax credit policies (which will equal more sales)

AR: will increase because credit is easier to get with the company. More people will take more time to pay, or won't pay at all (bad debts will also increase).

Profit: Decrease, because more accounts will go uncollected. ...

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