Which of the Following Statements Is CORRECT

question 43

Multiple Choice

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.

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Definitions:

Activity Levels

A measure used in cost accounting to evaluate the relation between the cost of a particular activity and the level of activity executed.

Operating Leverage

A measure of how revenue growth translates into growth in operating income, determined by the proportion of fixed versus variable costs a company has.

Contribution Margin

The difference between sales revenue and variable costs, indicating how much contributes towards covering fixed costs and generating profit.

Income from Operations

The earnings generated from a company's core business operations before subtracting interest and taxes.