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How might credit terms impact assets and ROA?

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The CFO of PQR Inc. was advised by his credit manager to give better credit terms to new customers to induce sales. The CFO was concerned about the effects of doing the same on the financial statements, such as total assets and return on total assets.

In your opinion, what could be the possible effects of following the advice of the credit manager on the financial statement items?

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Solution Summary

366 words in everyday language to step the student through the process of deciding how a particular event is going to impact assets and the numerator and denominator of return on assets (ROA).

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Yes, this is a classic dilemma!

So, let's think this through one step at a time. You offer better credit terms....they can take longer to pay, right? So, instead of getting cash in, say 30 days, you get it in 60 days.

Let's start with the balance sheet.

Any impact on assets? Yes. Think about AR? You'll have two months of sales sitting there instead of one, right? ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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