AAT L3 Accounts Payable & Receivable Advanced 4 — Questions and Answers
Question 1: An overdue customer account is passed to a debt collection agency when:
- The invoice is first issued
- The customer requests more time to pay
- Internal collection attempts have failed and the debt is significantly overdue (Correct answer)
- The balance is below the small claims threshold
Correct answer: Internal collection attempts have failed and the debt is significantly overdue
Debt collection agencies are used as a last resort after internal credit control has failed to recover an overdue debt; they typically charge a commission on amounts recovered.
Question 2: The purpose of a customer credit application form is to:
- Process the first order immediately
- Collect information needed to assess whether to extend credit and set appropriate credit terms (Correct answer)
- Record the customer's VAT number only
- Authorise a discount for the customer
Correct answer: Collect information needed to assess whether to extend credit and set appropriate credit terms
A credit application collects the customer's business details, financial information, bank and trade references, and directors' details, enabling the business to make an informed credit assessment before granting credit.
Question 3: Which of the following ratios measures how quickly customers are paying their invoices?
- Current ratio
- Payables days
- Receivables days (debtor days) (Correct answer)
- Gross profit margin
Correct answer: Receivables days (debtor days)
Receivables days = (Trade receivables / Revenue) × 365. It shows the average number of days customers take to pay, enabling comparison against credit terms and industry benchmarks.
Question 4: Discounts allowed are recorded in the accounts as:
- An increase in trade receivables
- A debit to discounts allowed expense and a credit to trade receivables (Correct answer)
- A credit to discounts received income and a debit to trade payables
- A debit to trade receivables and credit to bank
Correct answer: A debit to discounts allowed expense and a credit to trade receivables
Discounts allowed are given to customers for early payment; they are an expense (debit Discounts Allowed) and reduce the trade receivable balance (credit Trade Receivables).
Question 5: A business has total receivables of £120,000 and annual credit sales of £600,000. What are the receivables days?
- 50 days
- 60 days
- 73 days (Correct answer)
- 5 days
Correct answer: 73 days
Receivables days = (£120,000 / £600,000) × 365 = 0.2 × 365 = 73 days. This means customers take on average 73 days to pay.
Question 6: The payment run in accounts payable typically involves:
- Manually paying each invoice individually as it arrives
- Batching approved invoices together and processing payments on scheduled payment dates (Correct answer)
- Paying all invoices within 24 hours of receipt
- Only paying invoices that the manager personally approves on the day
Correct answer: Batching approved invoices together and processing payments on scheduled payment dates
A payment run batches approved payable invoices together and processes them on scheduled dates (e.g., weekly or twice monthly), improving efficiency, cash flow management, and control over payments.
AAT L3 Accounts Payable & Receivable Advanced 4
An overdue customer account is passed to a debt collection agency when: