Question

A conservative credit policy would be expected under which of the following conditions?

		high inventort levels
		A weak economy
		A strong economy
		Low costs for production and design

Persistency means that:

the sales people can continue to sell even though the account is overdue.

the debtor's account stays open for business.

the collection effort continues until the debt is paid or written off.

the credit terms stay in force even when the account is overdue.

Preferred creditors are those that are entitled to an order of priority payment from a bankrupt estate.  

		True
		False

Answer 1

In the first part of the question,

The correct answer is High Inventory levels.

Explanation - Conservative credit policy is a strict credit policy where credit lines is extended only to the most credit worthy accounts. High inventory levels require blocking of working capital. Hence to cover up a conservative credit policy could be adopted. When the cost of production and design is low, a liberal credit policy is adopted as there is not cash crunch. Also, the credit policy is irrespective of the weak or strong economy.

In the second part of the question,

The correct answer is - the collection effort continues until the debt is paid or written off.

In the third part of the question,

The correct answer is - True