AAT L3 Accounts Payable & Receivable Advanced 2 — Questions and Answers
Question 1: In accounts receivable, a 'cash on delivery' (COD) customer arrangement means:
- The customer has a generous credit limit
- Payment is required at the time of delivery before goods are released (Correct answer)
- Payment can be made within 90 days
- The customer pays by standing order
Correct answer: Payment is required at the time of delivery before goods are released
COD means the customer must pay for goods at the time of delivery; no credit is extended. This is used for new or high-risk customers to eliminate credit exposure.
Question 2: Which of the following is an example of a settlement discount (early payment discount)?
- A 10% quantity discount for ordering over 100 units
- A 2% discount if the invoice is paid within 10 days rather than the standard 30-day term (Correct answer)
- A trade discount applied to the catalogue price
- A discount for purchasing end-of-line stock
Correct answer: A 2% discount if the invoice is paid within 10 days rather than the standard 30-day term
A settlement (cash/prompt payment) discount incentivises early payment by offering a percentage reduction if the invoice is settled within a specified shorter period than the normal credit term.
Question 3: Factoring of trade receivables involves:
- The business collecting its own debts using a chasing service
- Selling the trade receivable book to a third party (factor) who advances a percentage of the face value immediately (Correct answer)
- Insuring trade receivables against bad debts
- Pledging receivables as security for a bank overdraft
Correct answer: Selling the trade receivable book to a third party (factor) who advances a percentage of the face value immediately
Invoice factoring involves selling the receivables to a factor (finance company) who advances typically 70–90% of the face value upfront; the factor then collects the debts and remits the balance (less fees) to the business.
Question 4: Under IAS 2 (and AAT-level principles), trade receivables should be shown on the balance sheet at:
- Their gross invoice value
- Net realisable value — gross amount less any allowance for doubtful debts (Correct answer)
- Historical cost of the goods sold
- The total amount billed including VAT
Correct answer: Net realisable value — gross amount less any allowance for doubtful debts
Trade receivables are presented at their expected recoverable amount — gross trade receivables minus any allowance for irrecoverable or doubtful debts — reflecting the amount the business expects to collect.
Question 5: A purchase order is raised by the buying company to:
- Record the goods received from a supplier
- Formally authorise and request goods or services from a supplier at agreed prices and terms (Correct answer)
- Pay the supplier's invoice
- Record the VAT on purchases
Correct answer: Formally authorise and request goods or services from a supplier at agreed prices and terms
A purchase order is an internal document that authorises buying and instructs the supplier to provide specified goods or services; it forms the basis for the three-way match (PO, GRN, invoice) control.
Question 6: The three-way match in accounts payable refers to matching:
- Invoice, credit note, and payment
- Purchase order, goods received note, and supplier invoice (Correct answer)
- Sales invoice, delivery note, and remittance
- Order form, bank statement, and ledger entry
Correct answer: Purchase order, goods received note, and supplier invoice
Three-way matching ensures the supplier's invoice agrees with the original purchase order (price, terms) and the goods received note (quantities received) before authorising payment — a key internal control.
AAT L3 Accounts Payable & Receivable Advanced 2
In accounts receivable, a 'cash on delivery' (COD) customer arrangement means: