Trade Credit & Accounts Receivable Management Flashcards
7 cards from real CCE practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Trade Credit & Accounts Receivable Management flashcards as text
What is accounts receivable factoring?
Answer: Selling accounts receivable to a third party (factor) at a discount for immediate cash
Factoring involves selling receivables outright to a factor at a discount, providing the seller with immediate liquidity and transferring collection risk.
The 'dilution rate' in accounts receivable management refers to:
Answer: Reductions to gross receivables from credits, returns, discounts, and allowances
Dilution is the reduction of gross AR from items such as credit memos, returns, trade discounts, and early payment discounts, which reduce the collectible amount.
A lockbox system PRIMARILY benefits a company by:
Answer: Accelerating the collection and posting of customer payments to reduce float
A lockbox directs customer payments to a bank-managed P.O. box, allowing the bank to process and deposit payments faster, reducing mail and processing float.
Under a recourse factoring arrangement, the selling company retains:
Answer: The risk of customer non-payment if the factor cannot collect
In recourse factoring, if the buyer (debtor) does not pay the factor, the selling company must repurchase the receivable, retaining the credit risk.
The Collection Effectiveness Index (CEI) differs from DSO in that CEI:
Answer: Measures the quality of collections relative to the amount that was collectible in the period
CEI measures what percentage of available receivables were collected in a period, providing a more accurate view of collection performance than DSO when sales fluctuate.
When a company places a customer account on 'credit hold,' it means:
Answer: New shipments or services are suspended until the account is brought current or resolved
A credit hold temporarily stops fulfillment of new orders for a customer until outstanding payment or credit issues are resolved, protecting the seller from additional exposure.
Which metric BEST measures the overall efficiency of the credit and collections function?
Answer: Bad debt as a percentage of credit sales
Bad debt as a percentage of credit sales directly quantifies the effectiveness of the credit function — lower percentages indicate better credit decisions and collection outcomes.