ABA ABA Credit & Collections Management

Question 1

What is the primary purpose of a credit policy in a business?

Accepted Answer

To establish guidelines for extending credit to customers

Answer

A credit policy establishes the guidelines and criteria a business uses when deciding whether to extend credit to customers.

Question 2

Which financial ratio is most commonly used to evaluate a customer's ability to pay short-term obligations?

Accepted Answer

Current ratio

Answer

The current ratio (current assets ÷ current liabilities) measures a company's ability to pay its short-term obligations.

Question 3

What does Days Sales Outstanding (DSO) measure?

Accepted Answer

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

Answer

DSO measures the average number of days it takes a business to collect payment after a sale has been made.

Question 4

A customer's credit application shows a high debt-to-income ratio. What does this indicate?

Accepted Answer

The customer may have difficulty repaying additional debt

Answer

A high debt-to-income ratio indicates the customer already has significant debt obligations relative to income, suggesting difficulty in taking on more debt.

Question 5

Which of the following is a common method for aging accounts receivable?

Accepted Answer

Categorizing invoices by how long they have been outstanding

Answer

Accounts receivable aging categorizes outstanding invoices by how long they have been unpaid (e.g., 0-30 days, 31-60 days, 61-90 days).

(ABA) Accredited Business Accountant Practice Test

(ABA) Accredited Business Accountant Practice Test

ABA ABA Credit & Collections Management