In general, the larger the portion of a firm's sales that are on credit, the:
A. lower will be the firm's need to borrow
B. higher will be the firm's need to borrow
C. more rapidly credit sales will be paid off
D. more the firm can buy raw materials on credit
This question seems straight foward, the more a firm sells on credit the less inventory and cash the company will have. The company may have to borrow the maoney it needs to operate.
B is my answer ....is this correct?
I agree; B. is the only one that makes sense.
Answer is B.
Your answer is incorrect. The correct answer is A. lower will be the firm's need to borrow.
When a firm sells on credit, it allows customers to make purchases without immediate payment, and instead, payment is expected at a later date. This means that the firm will receive the cash from these credit sales at a future point in time. As a result, the firm's need to borrow funds will be lower since it will have accounts receivable from the credit sales. These accounts receivable can be used as collateral to obtain financing or as a source of cash to meet the firm's obligations.
So, the larger the portion of a firm's sales that are on credit, the lower will be the firm's need to borrow.
Yes, you are correct. The answer is B. The larger the portion of a firm's sales that are on credit, the higher will be the firm's need to borrow.
Here's an explanation to help you understand why this is the case:
When a firm sells goods or services on credit, it means that the customer is allowed to defer payment and pay at a later date. This creates an accounts receivable for the firm, which represents the amount of money owed to the firm by its customers.
When a firm has a larger portion of its sales on credit, it means that it has a higher amount of accounts receivable. However, these accounts receivable are not immediately converted into cash. As a result, the firm may experience a delay in receiving payment for its sales.
In the meantime, the firm still needs cash to cover its operating expenses, pay for inventory, and meet other financial obligations. If the firm's cash reserves are insufficient, it may need to borrow money to fill the gap between its immediate cash needs and the delayed cash inflows from accounts receivable.
Therefore, the more a firm sells on credit, the higher its need to borrow funds to bridge the gap between accounts receivable and immediate cash needs. This is why option B is the correct answer.