Question

One reason a firm is cautious about extending credit is:

a) Increasing customer loyalty
b) Enhancing cash flow
c) Minimizing bad debt risk
d) Maximizing sales revenue

Answer 1

The correct answer is c) Minimizing bad debt risk.

Step-by-step explanation:

One reason a firm is cautious about extending credit is to minimize the risk of bad debt. When a firm extends credit to a customer, there is always a risk that the customer may fail to repay the credit, resulting in bad debt. Bad debt can be costly for a company as it affects the firm's cash flow and profitability.

Option a) increasing customer loyalty might be a positive outcome of extending credit, but it is not the primary reason for caution. Option b) enhancing cash flow is generally seen as a benefit of extending credit, not a reason for caution. Option d) maximizing sales revenue is also a potential benefit of extending credit, but it does not address the associated risk of bad debt.

Answer 2

A firm is cautious about extending credit primarily to minimize bad debt risk, which can lead to financial losses. Managing credit risk ensures good reputation and repeat customers which are key for the firm's long-term success.

Step-by-step explanation:

One reason a firm is cautious about extending credit is to minimize bad debt risk. When a firm extends credit, there is the potential for customers to default on their payments, which creates a financial loss for the company. This risk is particularly concerning for firms that have significant revenue or profit. Effective management of credit by a firm ensures a good reputation and encourages repeat customers, which are essential for long-term success. A firm with a strong reputation, such as a well-established grocery store, can command higher prices than less reputable competitors. Extending credit might boost sales in the short term but must be balanced against the risk of customers not fulfilling their payment obligations.