Question

The problem with selling on credit is that extending credit to the customer is practically the same as:

a) Gifting the product
b) Financing the customer
c) Reducing production costs
d) Increasing profit margins

Answer 1

The correct answer is b) Financing the customer.

Step-by-step explanation:

Extending credit to a customer means allowing them to make a purchase and pay for it at a later date, typically with interest. This is similar to providing financing to the customer, as the seller is essentially lending them the money to make the purchase. The customer receives the product immediately, but the seller takes on the risk of the customer not paying or paying late.

Option a) gifting the product is not accurate since the customer is expected to repay the credit provided. Option c) reducing production costs and option d) increasing profit margins are not directly related to extending credit to the customer.

Answer 2

Selling on credit is equivalent to financing the customer, as it involves providing the product or service now while receiving payment at a later time, impacting the company's cash flow and financial stability.

Step-by-step explanation:

The problem with selling on credit is that extending credit to the customer is practically the same as financing the customer. When a company sells on credit, it allows the customer to receive the product or service immediately while delaying payment to a later date. This is equivalent to providing a loan to the customer; the business does not receive cash immediately and instead has an amount due indicated in its receivables. This is similar to the principle that applies to agricultural growers who deal with market rates and must sell their produce at the going rate, without the immediate exchange of goods for cash. Furthermore, selling on credit carries the risk of customers defaulting, which can affect the seller's cash flow and financial stability. It is a strategic decision that might involve assessing the need for financial capital and the means through which it can be accessed, such as borrowing from a bank or issuing stock, each with its own set of advantages and risks.