Which of the following best describes credit sales?
a) Cash sales to customers that are new to the company.
b) Sales to customers using credit cards.
c) Sales to customers on account.
d) Sales with a high risk that the customer will return the product.
Answer Explanation for Question: Which of the following best describes credit sales?
Credit sales refer to the transfer of ownership of goods or services to a customer, with the amount due to be paid at a later date. The credit sale is the purchase of a product made by a customer who does not make full payment at the time of purchase. With delayed payments, customers generate cash with their purchases, which is then used to repay the seller. Therefore, a reasonable payment delay allows customers to purchase additional goods.
In some industries, credit sales can be a critical tool for competitive advantage, enabling longer payment terms to entice more customers. Credit sales have the downside of bad debt losses. Also, a credit and collections department are necessary for the seller.
Advantages of Credit Sales
- The advantage of credit sales is that it can be used to easily acquire new customers and offer of the credit can attract new customers to purchase from the company.
- In similar way, offering credit gives customers the option to purchase now and pay for their purchases later when cash is not available.
Disadvantages of Credit Sales
- The disadvantage of credit sales is that customers can potentially go bankrupt. When customers go bankrupt, the amount owed may be unrecoverable and must be written off.
- Costs of collection may decrease profits. In the case when a customer misses the payment or refuses to pay, the company may incur collection costs in trying to obtain the payment.
I hope after going through this post you might have clearly understood the Question: Which of the following best describes credit sales?