Question

A firm's collection policy, i.e., the procedures it follows to collect accounts receivable, plays an important role in keeping its average collection period short, although too strict a collection policy can reduce profits due to lost sales.
a) true
b) false

Answer 1

Answer:

a) true

Explanation:

The average collection period could be computed by

= Total number of days in a year ÷ account receivable turnover ratio

It determines the number of days in which the customers pay the amount to the company.

If the payment is made within the prescribed time or early so it shows the goods performance else it reflects the worst performance

Therefore according to the given situation, if there is strictness in collection policy which ultimately reduced profit due to lost sales plays a very important role in shorten the collection period