Question : Which of the following statements are correct with respect of the debt collection period?
Option 1: Increase in average collection period indicates the excessive blockage of funds with trade receivables which increases the chances of bad debts.
Option 2: A higher average collection period is thus, an indication of the inefficiency and negligency on the part of management.
Option 3: if there is decrease in average collection period, it indicates prompt payment by trade receivables which reduces the chances of bad debts.
Option 4: All of the above
Correct Answer: All of the above
Solution : Answer = All of the above .
An increase in the average collection period signals a potential risk of bad debts due to funds being tied up longer. A higher collection period reflects management inefficiency. Conversely, a decrease suggests prompt payment, reducing bad debt risks and indicating effective receivables management.
Hence, the correct option is 4.
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