Which of the following statements is CORRECT?
A) If a firm that sells on terms of net 30 changes its policy to 2/10 net 30, and if no change in sales volume occurs, then the firm's DSO will probably increase.
B) If a firm sells on terms of 2/10 net 30, and its DSO is 30 days, then the firm probably has some past-due accounts.
C) If a firm sells on terms of net 60, and if its sales are highly seasonal, with a sharp peak in December, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in January than in July.
D) If a firm changed the credit terms offered to its customers from 2/10 net 30 to 2/10 net 60, then its sales should increase, and this should lead to an increase in sales per day, and that should lead to a decrease in the DSO.
E) Other things held constant, the higher a firm's days sales outstanding (DSO), the better its credit department.

Question

Quizplus · Accepted Answer

Statement B is correct because if a firm's Days Sales Outstanding (DSO) is equal to the net term of 30 days, it indicates that, on average, it takes 30 days for the firm to collect its receivables. Since the firm offers a discount for payments made within 10 days, the expectation would be for the DSO to be less than 30 days if all accounts were current. A DSO of 30 days suggests that some customers are not taking advantage of the discount and are possibly paying after the discount period, indicating the presence of past-due accounts.

Which of the Following Statements Is CORRECT