AAT L4 Credit Management 3 — Questions and Answers
Question 1: Net credit days (days sales outstanding — DSO) differs from standard debtor days because:
- Net credit days does not include VAT in the calculation
- It accounts for settlements and discounts to more accurately reflect the timing of actual cash receipt (Correct answer)
- It measures payables rather than receivables
- It is only used for export credit management
Correct answer: It accounts for settlements and discounts to more accurately reflect the timing of actual cash receipt
DSO (or net credit days) may be refined by stripping out VAT, adjusting for credit notes and settlement discounts, and weighting recent sales more heavily — giving a more accurate picture of actual collection timing.
Question 2: A business accepts a bill of exchange from a customer in settlement of a trade debt. The bill of exchange is:
- A legal court judgment
- An unconditional written order to pay a specified sum on a specified date — the business holds this as an asset until it falls due (Correct answer)
- A credit insurance policy
- A personal guarantee from the customer's director
Correct answer: An unconditional written order to pay a specified sum on a specified date — the business holds this as an asset until it falls due
A bill of exchange is a negotiable instrument — an unconditional written order requiring the drawee (customer) to pay the specified sum on demand or at a specified future date; the holder (business) can discount it at a bank if early cash is needed.
Question 3: Export credit risk is more complex than domestic credit risk because:
- Export customers always pay faster than domestic customers
- Additional risks include country risk, currency risk, and legal system differences making debt recovery more difficult (Correct answer)
- Export sales do not require any credit assessment
- There are no late payment interest rules for overseas debtors
Correct answer: Additional risks include country risk, currency risk, and legal system differences making debt recovery more difficult
Export credit introduces additional risks beyond normal trade credit: country/political risk (government actions, war), currency risk (exchange rate movements), and cross-border legal complexity (enforcing judgments in foreign jurisdictions).
Question 4: In the context of credit management, a 'netting agreement' allows:
- All group companies to share one single credit limit with a customer
- A business and its customer/supplier (where both owe each other) to offset mutual balances and settle only the net difference (Correct answer)
- Debtors to pay their invoices in instalments
- Multiple currencies to be converted to sterling before payment
Correct answer: A business and its customer/supplier (where both owe each other) to offset mutual balances and settle only the net difference
A netting agreement between two parties who buy from and sell to each other allows them to offset payables against receivables and settle only the net balance — reducing gross cash flows and credit exposure.
Question 5: Predictive analytics in credit management can be used to:
- Automatically write off all debts over 90 days
- Identify customers with increased probability of default based on payment behaviour patterns and financial data (Correct answer)
- Replace the need for a credit team entirely
- Set credit limits based on the customer's website design
Correct answer: Identify customers with increased probability of default based on payment behaviour patterns and financial data
Predictive models (using machine learning or statistical analysis) analyse patterns in payment behaviour, financial ratios, and external data to flag customers showing early signs of financial distress before they default.
Question 6: Which of the following is an advantage of offering a settlement discount to encourage early payment?
- It increases the total amount received from the customer
- It accelerates cash collection, reducing receivable days and financing costs — though the discount cost must be weighed against the benefit (Correct answer)
- It eliminates bad debt risk entirely
- It removes the need for any credit control procedures
Correct answer: It accelerates cash collection, reducing receivable days and financing costs — though the discount cost must be weighed against the benefit
Early payment discounts reduce receivable days, accelerating cash inflows and reducing the cost of financing debtors. The cost (discount given) must be compared against the financing benefit (cost of alternative funding) to assess economic viability.
AAT L4 Credit Management 3
Net credit days (days sales outstanding — DSO) differs from standard debtor days because: