Interpretation

In an attempt to increase sales revenue during the year, C Co offered extended credit terms to its major customers. Whilst many major customers took advantage of the extended credit period, C Co did not increase its volume of sales. What impact did this have upon the current ratio? A There was no change to the current ratio B It is not possible to determine the impact on the current ratio as there is insufficient information available C The current ratio increased D The current ratio decreased Answer is C. It is saying that sales are constant so it means that receivable already outstanding would have taken advantage of extended period. How receivable would increase then which will increase Current ratio?

Maximus: Selling more will increase the receivables but it doesn't mean that it will take any longer to collect the money. James: If customers take longer to pay then receivables will increase.

Tutor, receivable collection period would increase but the amount of Account Receivable would be constant as no increase in sales? I mean to say old customer who were already our receivable would have delayed payments but no new customer would have came if it has so our sales should need to be increased. Current Asset would be constant right?

Suppose that the collection period increased from 1 month to 2 months. In that case the receivables would increase from 1 months worth of sales to 2 months worth. Receivables will increase and therefore current assets increase and therefore the current ratio will increase.