Which of the following is a disadvantage of extending credit to customers?

• A. Reduced sales volume
• B. Immediate cash inflow from all sales
• C. Lower administrative costs
• D. Increased risk of uncollectible accounts

Answer: (D)

Verified step by step guidance

1. Understand the concept of extending credit to customers: Extending credit means allowing customers to purchase goods or services and pay for them at a later date, rather than requiring immediate payment.
2. Identify the potential disadvantages of extending credit: While it can increase sales volume by attracting customers who may not have immediate cash, it also introduces risks and costs.
3. Focus on the specific disadvantage mentioned in the problem: 'Increased risk of uncollectible accounts.' This refers to the possibility that some customers may fail to pay their debts, leading to financial losses for the company.
4. Compare the other options provided: 'Reduced sales volume' is incorrect because extending credit typically increases sales volume. 'Immediate cash inflow from all sales' is incorrect because credit sales delay cash inflow. 'Lower administrative costs' is incorrect because managing credit accounts often increases administrative costs.
5. Conclude that the correct answer is 'Increased risk of uncollectible accounts,' as this is a direct disadvantage of extending credit to customers.