ABA Credit & Collections Management Flashcards
6 cards from real ABA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 ABA Credit & Collections Management flashcards as text
What is the primary purpose of a credit policy in a business?
Answer: To establish guidelines for extending credit to customers
A credit policy establishes the guidelines and criteria a business uses when deciding whether to extend credit to customers.
Which financial ratio is most commonly used to evaluate a customer's ability to pay short-term obligations?
Answer: Current ratio
The current ratio (current assets ÷ current liabilities) measures a company's ability to pay its short-term obligations.
What does Days Sales Outstanding (DSO) measure?
Answer: The average number of days it takes to collect payment after a sale
DSO measures the average number of days it takes a business to collect payment after a sale has been made.
A customer's credit application shows a high debt-to-income ratio. What does this indicate?
Answer: The customer may have difficulty repaying additional debt
A high debt-to-income ratio indicates the customer already has significant debt obligations relative to income, suggesting difficulty in taking on more debt.
Which of the following is a common method for aging accounts receivable?
Answer: Categorizing invoices by how long they have been outstanding
Accounts receivable aging categorizes outstanding invoices by how long they have been unpaid (e.g., 0-30 days, 31-60 days, 61-90 days).
What is a collection agency in the context of accounts receivable?
Answer: A third-party company hired to recover unpaid debts
A collection agency is a third-party company that businesses hire to pursue and recover debts that customers have failed to pay.