Certified Internal Auditor (CIA) Part 3: Business Knowledge for Internal Auditing — Question 18

In an analysis of alternative credit-management policies, which of the following components will cause the net present value of receivables on credit sales to increase, if everything else remains constant?

Answer options

• A. A tougher collections policy that reduces the bad debt loss ratio.
• B. A higher cost per unit sold.
• C. A longer average collection period.
• D. An increase in the cost of capital.

Correct answer: A

Explanation

A tougher collections policy that reduces the bad debt loss ratio decreases the amount of uncollectible accounts, which directly increases the net present value of receivables. The other options either increase costs or extend collection times, which would decrease net present value rather than increase it.