AAT L4 Credit Management 2 — Questions and Answers
Question 1: The calculation of receivables days (debtor days) is:
- Receivables / Annual sales revenue × 365 (Correct answer)
- Annual sales revenue / Receivables
- Receivables / Average daily purchases × 365
- Total revenue / 12
Correct answer: Receivables / Annual sales revenue × 365
Receivables days = (Trade receivables / Annual credit sales) × 365. It measures the average number of days customers take to pay, enabling comparison against credit terms and monitoring trends.
Question 2: An effective collections strategy for overdue accounts typically follows which sequence?
- Immediately refer to a debt collection agency without any prior contact
- Friendly reminder, formal demand letter, final notice, legal action, or referral to a debt collection agency (Correct answer)
- Issue a writ without any prior communication
- Write off the debt after 30 days if unpaid
Correct answer: Friendly reminder, formal demand letter, final notice, legal action, or referral to a debt collection agency
A graduated collections process escalates proportionately: begin with a polite reminder, escalate to formal demand letters, issue a final notice before legal action, then pursue through the courts or collection agencies as a last resort.
Question 3: Which of the following ratios indicates that a customer may be experiencing liquidity difficulties?
- High gross profit margin
- Current ratio consistently below 1:1 (Correct answer)
- High asset turnover ratio
- Low gearing ratio
Correct answer: Current ratio consistently below 1:1
A current ratio below 1:1 means current liabilities exceed current assets — the customer may be unable to meet short-term obligations, suggesting potential payment difficulties for creditors like your business.
Question 4: Under the Late Payment of Commercial Debts (Interest) Act 1998, a creditor is entitled to charge statutory interest at:
- Bank of England base rate plus 4% per annum
- Bank of England base rate plus 8% per annum (Correct answer)
- A fixed rate of 15% per annum
- The rate specified in the invoice regardless of the contract
Correct answer: Bank of England base rate plus 8% per annum
The statutory interest rate under LPCD(I)A 1998 is 8% over the Bank of England base rate. It applies automatically to qualifying business-to-business debts where no contractual late payment rate is specified.
Question 5: A county court judgment (CCJ) obtained against a debtor:
- Immediately results in payment from the debtor
- Is a court order confirming the debt is owed; if unpaid it can be enforced through various methods (e.g., bailiffs, charging order) (Correct answer)
- Cancels the debt owed
- Automatically transfers the debt to a government recovery agency
Correct answer: Is a court order confirming the debt is owed; if unpaid it can be enforced through various methods (e.g., bailiffs, charging order)
A CCJ is a county court order confirming that the named individual or company owes the specified amount. If unpaid within the specified time, it can be enforced using enforcement tools such as enforcement agents (bailiffs), attachment of earnings, or a charging order on property.
Question 6: The Delphi technique in credit risk assessment refers to:
- A statistical model for predicting bankruptcy
- A method where expert opinions are gathered and refined iteratively to reach a consensus on credit risk (Correct answer)
- A spreadsheet tool for calculating credit scores
- A legal process for recovering debts through arbitration
Correct answer: A method where expert opinions are gathered and refined iteratively to reach a consensus on credit risk
The Delphi method collects the opinions of a panel of experts (e.g., experienced credit managers or financial analysts) through structured rounds of questionnaires, converging on a consensus view on risk — useful when quantitative data is insufficient.
AAT L4 Credit Management 2
The calculation of receivables days (debtor days) is: