UGM June 2019 Q18
0. Which one of the following is NOT an integral part of credit policy of a business firm?
- Option : D
- Explanation : Credit Policy of the Firm: There are two types of credit policies such as lenient and stringent credit policy . A firm that is following lenient credit policy tends to sell on credit to customers very liberally, which will increase the size of receivables. On the other hand, a firm that following stringent credit policy will have low size of receivables because the firm is very selective in providing stringent credit. A firm that is providing string one credit, may be able to collect debts prom ptly this will keep the level of receivables under control.
As we have seen in the credit policy the majority of firms follow a credit policy that lies between stringent and lenient, which is optimum credit policy. Optimum credit policy is one, which maximizes the firm’s operating profit. For establishing optimum credit policy, the financial manager must consider the important decision variables, which have bearing on the level of receivables. In other words, the credit policy variables have bearing on the level of sales, bad debt loss, discounts taken by customers, and the collection expenses. The major credit policy variable indude the following:
(a) Credit Standards,
(b) Credit Terms, and
(c) Collection Policy and Procedures.
