The firm is considering granting credit period to a customer, which of the following is most...
The firm is considering granting credit period to a customer, which of the following is most appropriate to be considered as an upper limit of the customer’s credit period?
A) The customer’s cash cycle
B) The firm’s operating cycle
C) The firm’s payable period
D) The customer’s operating cycle
Homework Answers
Solution: (D)
C is incorrect as payable period is not the upper limit as it has to do with firm's supplier.
A is incorrect as a customer can pay using other means also instead of waiting for cash in hand.
Only, option D is correct.
Note
Operating cycle=R+W+F+D−C
Where,
R = Raw material storage period
W = Work-in-progress holding period
F = Finished goods storage period
D = Receivables (Debtors) collection period
C = Credit period allowed by suppliers (Creditors)
So, as a customer considers revenue through accrual accounting, it should be able to pay.
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