Question

A restrictive short-term financial policy tends to:

A. reduce future sales more so than a flexible or relaxed policy.

B. reduce order costs as compared to a more flexible policy.

C. incur more carrying costs than a flexible or relaxed policy does.

D. encourage credit sales over cash sales.

E. grant credit to more customers

Please also explain why. Thank you!

Answer 1

A. reduce future sales more so than a flexible or relaxed policy.

A restrictive short-term financing policy requires maintenance of low current assets to sales. This implies that too much inventory is not stocked up. Hence the ordering cost is high because inventory is ordered multiple times. The carrying cost is low. Credit sales are not encouraged and minimum customers are granted credit to ensure minimum receivables. This reduces future sales because inventory is not readily available at all times.