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Question: A business can suffer a reduction in its bank balance in the year, yet make a profit Indicate which ONE of the following might cause this to happen?
A) The lengthening of the period of credit taken from its suppliers.
B) The lengthening of the period of credit given to its customers.
C) The sale of non-current assets at a loss.
D) The charging of depreciation in the Income Statement.
According to the Answers in the LSBF Revision Kit the answer to the above question is B) The lengthening of the period of credit given to its customers.
I, personally don’t understand this answer. I thought the answer is A) The lengthening of the period of credit taken from its suppliers.
Can someone please explain the reasoning behind B) as the answer.
Thank you.
Jegan
B is indeed correct.
The longer it is before we receive the money from our customers, the lower our bank balance will be.
(A is wrong because the longer we take before paying money to our suppliers, the bigger our bank balance will be).
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