The correct answer is: B. Profit and Increased Costs of Receivables
A firm’s credit policy is a set of guidelines that determine how a company extends credit to its customers. The goal of a credit policy is to maximize profits while minimizing the risk of non-payment.
There is a trade-off between increased sales and increased costs of receivables. When a company extends more credit, it will likely see an increase in sales. However, it will also have to carry more accounts receivable, which can lead to increased costs. These costs include the cost of carrying the receivables, such as the opportunity cost of the funds that could be invested elsewhere, and the cost of bad debts, which are accounts that are never paid.
The optimal credit policy is the one that maximizes profits. This will vary depending on the specific circumstances of the company, such as its industry, its customer base, and its financial situation.
Here is a brief explanation of each option:
- A. Sales and Increased Profit
This is not always the case. When a company extends more credit, it may see an increase in sales, but it will also have to carry more accounts receivable, which can lead to increased costs. These costs include the cost of carrying the receivables, such as the opportunity cost of the funds that could be invested elsewhere, and the cost of bad debts, which are accounts that are never paid.
- C. Sales and Cost of goods sold
The cost of goods sold is not affected by the credit policy. The cost of goods sold is the cost of the goods that a company sells. It is determined by the cost of the materials, labor, and overhead that go into producing the goods.
- D. None of the above
This is not the correct answer. The correct answer is B. Profit and Increased Costs of Receivables.