Certified Management Accountant Practice Exam

The calculation of increased investment in receivables often involves determining the incremental costs associated with extending credit and the length of time receivables are outstanding. The correct approach involves applying the incremental costs to the specific time period impacted by changes in the accounts collection cycle. Incremental costs refer to the additional costs incurred due to extending credit to customers, and adjusting for the actual number of days in the collection period helps quantify this cost effectively. By multiplying the incremental costs by the ratio of the incremental collection period (the additional days receivables are collected) to the total number of days in a year, one can estimate the increased investment in receivables that the organization will face as a result of the changes made in credit policies. This approach allows businesses to assess the financial impact of their credit policies and how they affect cash flow and working capital management, which is crucial for effective financial planning and analysis.