The quality of receivables refers to:
A. The creditworthiness of sellers.
B. The speed of collection.
C. The likelihood of collection without loss.
D. Sales turnover.
E. The interest rate.
The correct answer and explanation is :
The correct answer is C. The likelihood of collection without loss.
Explanation:
The quality of receivables is a critical aspect of financial management for businesses, as it directly impacts cash flow, liquidity, and overall financial stability. Receivables represent money owed to a business by its customers for goods or services provided on credit. The quality of these receivables refers to the likelihood that these amounts will be collected in full and without incurring a loss.
When businesses grant credit to customers, there is an inherent risk that some of these customers may default on their payments. Factors that affect the quality of receivables include the financial stability of the customer, the terms of the credit agreement, and the company’s collection practices. High-quality receivables are those that are more likely to be collected in full and on time, whereas low-quality receivables carry a higher risk of bad debts or write-offs.
To assess the quality of receivables, businesses often use metrics such as the accounts receivable turnover ratio and aging schedules. These tools help determine how quickly receivables are being collected and whether any accounts are overdue. A low turnover or high aging of receivables may indicate poor collection efforts or financial difficulties among customers, signaling a potential risk of loss.
In addition, businesses can improve the quality of receivables by setting clear credit policies, regularly reviewing the creditworthiness of customers, and actively managing collections. For example, offering discounts for early payment or tightening credit terms for customers with a poor payment history can reduce the likelihood of non-payment.
In summary, the quality of receivables is not simply about how fast they are collected or the interest rate applied; it is fundamentally about the probability of the business receiving the full payment owed without significant losses.