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Unformatted text preview: due. Changes in the credit period, the number of days after the beginning of the credit
period until full payment of the account is due, also affect a firm’s profitability.
For example, increasing a firm’s credit period from net 30 days to net 45 days
should increase sales, positively affecting profit. But both the investment in
accounts receivable and bad-debt expenses would also increase, negatively affecting profit. The increased investment in accounts receivable would result from
both more sales and generally slower pay, on average, as a result of the longer
credit period. The increase in bad-debt expenses results from the fact that the
longer the credit period, the more time available for a firm to fail, making it
unable to pay its accounts payable. A decrease in the length of the credit period is
likely to have the opposite effects. Note that the variables affected by an increase
in the credit period behave in the same way they would have if the credit standards had been relaxed, as demonstrated earlier in...
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