Credit Management Flashcards
6 cards from real AAT L4 practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Credit Management flashcards as text
What is meant by 'days payable outstanding' (DPO) and why is it relevant to credit management?
Answer: DPO measures how long the business takes to pay its own suppliers — managing it helps optimise working capital and supplier relationships
DPO = (Trade payables / Annual purchases) × 365. It shows how long the business takes to pay its suppliers — important for working capital management. Too short wastes liquidity; too long risks supplier relationship damage.
Credit risk concentration refers to:
Answer: Over-reliance on a small number of large customers, meaning the failure of one could cause disproportionate bad debt or revenue loss
Credit risk concentration occurs when a large proportion of receivables (or revenue) is owed by one or a few customers; the failure of any single large debtor could cause material bad debt and revenue loss.
An escalation matrix in credit management defines:
Answer: The authority levels at which different collection actions can be approved or initiated (e.g., who can authorise write-offs, legal action, or credit suspension)
An escalation matrix sets out who has authority to approve each level of collection action — for example, a supervisor may handle 30-day reminders, a manager may approve final demands, and the credit director approves legal action.
In credit management, the 'optimum credit period' balances:
Answer: The additional sales generated from extending credit against the increased cost of financing debtors and the incremental bad debt risk
The optimum credit period is where the marginal profit from additional sales enabled by extending credit equals the marginal cost — including financing cost of longer receivable days and higher bad debt risk.
Which of the following is a warning sign that a customer may be experiencing financial difficulty?
Answer: Consistent early payment followed by sudden requests for extended credit terms and part payment arrangements
Warning signs include: requests for extended payment terms, part payments, bounced cheques, declining order volumes, management changes, auditors' going concern qualifications, and delays in providing financial information.
A business sells goods on 30-day net terms but its customers typically pay in 55 days. The most appropriate immediate action is:
Answer: Issue statements of account, send reminders to all overdue accounts, and follow up by telephone to understand reasons for late payment
When customers are consistently paying late, the first step is to review the aged receivables, contact overdue accounts with reminders and statements, and investigate the reasons — then take appropriate action based on the findings.