Which of the following questions is most likely to be asked by a creditor when evaluating a company's receivables?

• A. What is the company's method for calculating inventory turnover?
• B. How does the company record depreciation on its equipment?
• C. What is the company's policy for issuing common stock?
• D. How likely is the company to collect its accounts receivable on time?

Answer: (D)

Verified step by step guidance

1. Understand the role of a creditor: A creditor is primarily concerned with the company's ability to repay its debts. Accounts receivable represent amounts owed to the company by customers, and timely collection of these receivables is crucial for the company's cash flow and ability to meet financial obligations.
2. Analyze the relevance of each option: The first three options (inventory turnover, depreciation methods, and common stock policy) are not directly related to the company's ability to collect receivables. These are more relevant to operational efficiency, asset management, and equity financing, respectively.
3. Focus on the correct question: The question 'How likely is the company to collect its accounts receivable on time?' directly addresses the creditor's concern about the company's liquidity and cash flow management.
4. Consider financial ratios: To evaluate the likelihood of timely collection, creditors often look at metrics such as the accounts receivable turnover ratio or the average collection period. These ratios provide insight into how efficiently the company collects receivables.
5. Conclude the reasoning: The correct question aligns with the creditor's primary interest in assessing the company's ability to generate cash from receivables, which impacts its ability to repay debts. This makes it the most relevant question for a creditor evaluating receivables.