Multiple Choice
Accounts receivable should be classified as a(n):
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7. Receivables and Investments
Types of Receivables
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A firm that buys goods and services on a given day, but pays for them later, is using which type of credit?
A
Trade credit
B
Interest receivable
C
Notes receivable
D
Accounts receivable
Verified step by step guidance1
Understand the concept of credit: Credit refers to the ability to obtain goods or services before payment, based on the trust that payment will be made in the future.
Define trade credit: Trade credit is a type of credit extended by suppliers to businesses, allowing them to purchase goods or services and pay for them at a later date. It is commonly used in business-to-business transactions.
Differentiate trade credit from other types of receivables: Interest receivable refers to interest earned but not yet received, notes receivable are formal written promises to pay, and accounts receivable are amounts owed by customers for goods or services already provided.
Identify the scenario described in the problem: The firm is purchasing goods and services and deferring payment, which aligns with the definition of trade credit.
Conclude that the correct type of credit being used in this situation is trade credit, as it matches the description provided in the problem.
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