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Trade Credit & Accounts Receivable Management Flashcards

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  1. A deduction management program in accounts receivable is designed to:

    Answer: Identify, validate, and resolve short payments or unauthorized deductions taken by customers

    Deduction management systematically processes short payments to determine if deductions are valid (e.g., pricing errors) or invalid (requiring collection), preserving revenue.

  2. Securitization of accounts receivable involves:

    Answer: Pooling receivables and selling interests in the pool to investors through a special purpose entity

    Securitization transfers a pool of receivables to an SPE, which issues asset-backed securities to investors, converting illiquid receivables into marketable securities.

  3. A 'best possible DSO' (BPDSO) is calculated using ONLY current (non-past-due) receivables. If actual DSO is significantly higher than BPDSO, this indicates:

    Answer: A large proportion of the AR balance is past due, signaling collection problems

    The gap between actual DSO and BPDSO reveals the days attributable to past-due accounts; a large gap indicates serious delinquency in the receivables portfolio.

  4. Under the Uniform Commercial Code (UCC), Article 9 governs:

    Answer: Secured transactions, including the use of accounts receivable as collateral

    UCC Article 9 governs secured transactions and establishes rules for creating and perfecting security interests in personal property, including accounts receivable.

  5. The 'cash application' process in accounts receivable refers to:

    Answer: Matching incoming customer payments to the specific open invoices they are intended to settle

    Cash application is the process of identifying and posting customer remittances to the correct open invoices, keeping the AR ledger accurate and current.

  6. A credit executive is evaluating whether to extend credit to a new business customer. Which of the following is the MOST reliable indicator of the customer's ability to pay?

    Answer: Audited financial statements showing cash flow from operations

    Audited financial statements, especially cash flow from operations, provide an independent, verified picture of the company's ability to generate cash to meet obligations.

  7. When is it MOST appropriate to write off an account receivable as uncollectible?

    Answer: After all reasonable collection efforts have been exhausted and the account is deemed uncollectible

    A write-off should occur only after all reasonable collection steps (dunning, collection agency, legal action) have been exhausted and recovery is no longer probable.