Question

Marion Industries has an average accounts receivable turnover ratio of 12 times per year whereas most of its competitors have a ratio nearer to 8 times. This suggests that Marion's management should consider _____.

A. using stricter credit terms
B. more aggressive collection efforts to avoid having its resources tied up in accounts receivable
C. using more liberal credit terms to increase sales
D. the need to sell for cash rather than on credit

Answer 1

C) using more liberal credit terms to increase sales

Step-by-step explanation:

An accounts receivable turnover ratio of 12 means that it takes Marion approximately 30 days to collect its accounts receivables.

If its competitors have an accounts receivable turnover ratio of 8, it means that it takes them approximately 45 days to collect their accounts receivables.

If Marion wants to operate in a similar way to its competition, they should loosen up their credit terms and extend them a few more days in order to attract a larger number of customers. Depending on what Marion sells, longer credit terms might be a good idea.