AICPA Exam CPA-Business Topic 2 Question 20 Discussion

Choice 'd' is correct. Offering favorable credit terms is usually a response to either competitive forces in the market or to improve cash flow.

Choice 'a' is incorrect, although the payment terms of AR is a form of borrowing (or lending) to customers, companies are more likely to extend credit terms because of competitive pressures rather than because it represents a cheaper form of borrowing.

Choice 'b' is incorrect. The cost of capital at (or approaching) the prime rate is irrelevant without additional information.

Choice 'c' is incorrect. If most competitors are not offering discounts or credit terms, there is no reason to offer them. Also, if there is a surplus of cash, there is no reason to accelerate accounts receivable collection by offering credit terms.