CCE Trade Credit & Accounts Receivable Management 1 — Questions and Answers
Question 1: A company has net credit sales of $2,400,000 and average accounts receivable of $200,000. What is the accounts receivable turnover ratio?
- 8 times
- 12 times (Correct answer)
- 6 times
- 10 times
Correct answer: 12 times
AR Turnover = Net Credit Sales / Average AR = $2,400,000 / $200,000 = 12 times.
Question 2: What does Days Sales Outstanding (DSO) measure?
- The number of days inventory is held before sale
- The average number of days it takes to collect payment after a sale (Correct answer)
- The number of days payables are outstanding
- The average collection period for overdue accounts only
Correct answer: The average number of days it takes to collect payment after a sale
DSO measures the average number of days between making a credit sale and receiving payment, indicating collection efficiency.
Question 3: Credit terms of '2/10 net 30' mean that a buyer receives a 2% discount if payment is made within 10 days; otherwise, the full amount is due within 30 days. What is the annualized cost of NOT taking this discount?
- approximately 24.5%
- approximately 36.7% (Correct answer)
- approximately 18.0%
- approximately 12.0%
Correct answer: approximately 36.7%
Annualized cost = (Discount% / (1 - Discount%)) × (365 / (Net Days - Discount Days)) = (2/98) × (365/20) ≈ 37.2%, closest to 36.7%.
Question 4: An accounts receivable aging schedule is PRIMARILY used to:
- Calculate the bad debt expense for the income statement
- Identify the age distribution of outstanding receivables to assess collection risk (Correct answer)
- Determine the credit limit for new customers
- Reconcile the AR ledger with the general ledger
Correct answer: Identify the age distribution of outstanding receivables to assess collection risk
An aging schedule categorizes receivables by how long they have been outstanding, helping credit managers identify at-risk accounts and prioritize collections.
Question 5: Which of the following BEST describes trade credit?
- A short-term bank loan used to finance inventory purchases
- Credit extended by one business to another for the purchase of goods or services (Correct answer)
- A revolving line of credit issued by a financial institution
- Credit extended directly to consumers for retail purchases
Correct answer: Credit extended by one business to another for the purchase of goods or services
Trade credit is credit extended by a seller (supplier) to a buyer (business customer) allowing the purchase of goods or services on deferred payment terms.
Question 6: A credit department establishes a bad debt reserve (allowance for doubtful accounts). Which accounting method does this represent?
- Direct write-off method
- Allowance method (Correct answer)
- Cash basis method
- FIFO inventory method
Correct answer: Allowance method
The allowance method pre-estimates uncollectible accounts and establishes a contra-asset reserve, matching bad debt expense to the period of the related sale.
Question 7: Trade credit insurance PRIMARILY protects a seller against:
- Losses from currency exchange fluctuations
- Non-payment by buyers due to insolvency or protracted default (Correct answer)
- Employee fraud in the accounts receivable department
- Errors in billing and invoice processing
Correct answer: Non-payment by buyers due to insolvency or protracted default
Trade credit insurance covers the risk that a buyer fails to pay its trade debt due to insolvency, bankruptcy, or protracted default.
CCE Trade Credit & Accounts Receivable Management 1
A company has net credit sales of $2,400,000 and average accounts receivable of $200,000.
What is the accounts receivable turnover ratio?