If a firm relaxes its credit standards, the volume of accounts receivable increases and so does the firm's carrying cost.

Question

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When a firm relaxes its credit standards, it is likely to sell more products or services on credit, which increases the volume of accounts receivable. However, this also means that the firm is taking on more credit risk, which results in higher carrying costs such as bad debts, collection costs, and the cost of financing the accounts receivable.

If a Firm Relaxes Its Credit Standards, the Volume of Accounts