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Trade Credit & Accounts Receivable Management Flashcards

7 cards from real CCE practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

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  1. A company has net credit sales of $2,400,000 and average accounts receivable of $200,000. What is the accounts receivable turnover ratio?

    Answer: 12 times

    AR Turnover = Net Credit Sales / Average AR = $2,400,000 / $200,000 = 12 times.

  2. What does Days Sales Outstanding (DSO) measure?

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

    DSO measures the average number of days between making a credit sale and receiving payment, indicating collection efficiency.

  3. Credit terms of '2/10 net 30' mean that a buyer receives a 2% discount if payment is made within 10 days; otherwise, the full amount is due within 30 days. What is the annualized cost of NOT taking this discount?

    Answer: approximately 36.7%

    Annualized cost = (Discount% / (1 - Discount%)) × (365 / (Net Days - Discount Days)) = (2/98) × (365/20) ≈ 37.2%, closest to 36.7%.

  4. An accounts receivable aging schedule is PRIMARILY used to:

    Answer: Identify the age distribution of outstanding receivables to assess collection risk

    An aging schedule categorizes receivables by how long they have been outstanding, helping credit managers identify at-risk accounts and prioritize collections.

  5. Which of the following BEST describes trade credit?

    Answer: Credit extended by one business to another for the purchase of goods or services

    Trade credit is credit extended by a seller (supplier) to a buyer (business customer) allowing the purchase of goods or services on deferred payment terms.

  6. A credit department establishes a bad debt reserve (allowance for doubtful accounts). Which accounting method does this represent?

    Answer: Allowance method

    The allowance method pre-estimates uncollectible accounts and establishes a contra-asset reserve, matching bad debt expense to the period of the related sale.

  7. Trade credit insurance PRIMARILY protects a seller against:

    Answer: Non-payment by buyers due to insolvency or protracted default

    Trade credit insurance covers the risk that a buyer fails to pay its trade debt due to insolvency, bankruptcy, or protracted default.