Multiple Choice
Which of the following is classified as a trade receivable?
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7. Receivables and Investments
Types of Receivables
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Which of the following is a potential drawback of speeding up the collection of receivables?
A
It may damage customer relationships due to aggressive collection practices.
B
It leads to higher interest income from outstanding receivables.
C
It guarantees a reduction in bad debt expense.
D
It always increases the company's total revenue.
Verified step by step guidance1
Understand the concept of receivables: Receivables represent amounts owed to a company by its customers for goods or services provided on credit. Managing receivables efficiently is crucial for maintaining cash flow and financial health.
Analyze the impact of speeding up receivables collection: Companies may implement strategies such as stricter payment terms or aggressive collection practices to accelerate cash inflows. However, these actions can have consequences.
Evaluate the potential drawbacks: Aggressive collection practices may strain customer relationships, as customers might feel pressured or dissatisfied. This could lead to a loss of future business or damage to the company's reputation.
Consider the other options provided: Higher interest income from outstanding receivables is not directly related to speeding up collections. A reduction in bad debt expense is not guaranteed, as it depends on the effectiveness of the collection strategy. Increasing total revenue is also not a direct result of faster collections.
Conclude that the correct drawback is the potential damage to customer relationships due to aggressive collection practices, as this aligns with the nature of the problem and the options provided.
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