When a firm stretches accounts payable without hurting its credit rating, the cost of foregoing the cash discount is
A) reduced.
B) increased.
C) unaffected.
D) immaterial.

Question

Quizplus · Accepted Answer

Stretching accounts payable allows the firm to hold onto their cash for a longer period of time. If the firm can avoid hurting its credit rating by doing so, the cost of foregoing the cash discount (which is usually less than the interest charged on borrowing) is reduced. This is because the longer payment period allows the firm to use the cash for other purposes such as greater investment opportunities or paying other expenses.

When a Firm Stretches Accounts Payable Without Hurting Its Credit