For example increasing a firms credit period from net

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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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This document was uploaded on 01/19/2014.

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