CCE Trade Credit & Accounts Receivable Management

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?

Accepted Answer

12 times

Answer

8 times

Answer

6 times

Answer

10 times

Question 2

What does Days Sales Outstanding (DSO) measure?

Accepted Answer

The average number of days it takes to collect payment after a sale

Answer

The number of days inventory is held before sale

Answer

The number of days payables are outstanding

Answer

The average collection period for overdue accounts only

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?

Accepted Answer

approximately 36.7%

Answer

approximately 24.5%

Answer

approximately 18.0%

Answer

approximately 12.0%

Question 4

An accounts receivable aging schedule is PRIMARILY used to:

Accepted Answer

Identify the age distribution of outstanding receivables to assess collection risk

Answer

Calculate the bad debt expense for the income statement

Answer

Determine the credit limit for new customers

Answer

Reconcile the AR ledger with the general ledger

Question 5

Which of the following BEST describes trade credit?

Accepted Answer

Credit extended by one business to another for the purchase of goods or services

Answer

A short-term bank loan used to finance inventory purchases

Answer

A revolving line of credit issued by a financial institution

Answer

Credit extended directly to consumers for retail purchases

Question 6

A credit department establishes a bad debt reserve (allowance for doubtful accounts). Which accounting method does this represent?

Accepted Answer

Allowance method

Answer

Direct write-off method

Answer

Cash basis method

Answer

FIFO inventory method

Question 7

Trade credit insurance PRIMARILY protects a seller against:

Accepted Answer

Non-payment by buyers due to insolvency or protracted default

Answer

Losses from currency exchange fluctuations

Answer

Employee fraud in the accounts receivable department

Answer

Errors in billing and invoice processing