Business Analysis and Financial Ratios Practice Test

When accounts receivable is growing faster than sales, the issue is how quickly customers pay and what credit terms are in place. AR represents money owed to you, so if it climbs faster than revenue, cash inflows are lagging and liquidity can be squeezed. The factor to investigate is collection delays and changes in credit terms because these directly affect how long money remains outstanding and how much is being extended to customers.

Look at metrics like days sales outstanding and the aging of receivables to see if payments are taking longer or if more receivables are moving into older buckets. You may find customers delaying payments, or you’ve loosened credit terms or discounts, allowing more credit sales that aren’t being collected promptly. These patterns explain why AR would outpace sales and point to actionable steps such as tightening credit policies, tightening collections processes, or revising terms to improve cash flow.

Other options don’t directly explain the mismatch: inventory obsolescence concerns stock and its liquidation timing, marketing spend affects demand and sales but not the speed of cash collection, and debt refinancing costs relate to financing rather than how quickly receivables are collected.