Which of the following statements about the credit that a firm allows to its customers is NOT correct?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → The credit terms a firm allows depend upon the credit it gets from its suppliers.
Option (1) The credit terms a firm allows depend upon the credit worthiness of its clientele. — True. A firm gives easier credit to customers who can be trusted to pay. So credit terms depend upon the credit worthiness of the clientele.
Option (2) The credit terms a firm allows depend upon the level of competition it faces. — True. When rivals give long credit, the firm must match them. So credit terms depend upon the level of competition.
Option (3) The credit terms a firm allows depend upon the credit it gets from its suppliers. — False. Credit from suppliers is a separate factor called credit availed, which lowers the working capital needed. The terms a firm allows its customers rest on competition and the clientele’s credit worthiness.
Option (4) A liberal credit policy results in a higher amount of debtors for the firm. — True. Under liberal credit, customers pay later, so debtors rise. This raises the working capital requirement.
NCERT (2026-27 Edition): “6. Credit Allowed: Different firms allow different credit terms to their customers. These depend upon the level of competition that a firm faces as well as the credit worthiness of their clientele. A liberal credit policy results in higher amount of debtors, increasing the requirement of working capital.” “7. Credit Availed: Just as a firm allows credit to its customers it also may get credit from its suppliers. To the extent it avails the credit on purchases, the working capital requirement is reduced.” |