CCE Trade Credit & Accounts Receivable Management 2

Question 1

What is accounts receivable factoring?

Accepted Answer

Selling accounts receivable to a third party (factor) at a discount for immediate cash

Answer

Factoring involves selling receivables outright to a factor at a discount, providing the seller with immediate liquidity and transferring collection risk.

Question 2

The 'dilution rate' in accounts receivable management refers to:

Accepted Answer

Reductions to gross receivables from credits, returns, discounts, and allowances

Answer

Dilution is the reduction of gross AR from items such as credit memos, returns, trade discounts, and early payment discounts, which reduce the collectible amount.

Question 3

A lockbox system PRIMARILY benefits a company by:

Accepted Answer

Accelerating the collection and posting of customer payments to reduce float

Answer

A lockbox directs customer payments to a bank-managed P.O. box, allowing the bank to process and deposit payments faster, reducing mail and processing float.

Question 4

Under a recourse factoring arrangement, the selling company retains:

Accepted Answer

The risk of customer non-payment if the factor cannot collect

Answer

In recourse factoring, if the buyer (debtor) does not pay the factor, the selling company must repurchase the receivable, retaining the credit risk.

Question 5

The Collection Effectiveness Index (CEI) differs from DSO in that CEI:

Accepted Answer

Measures the quality of collections relative to the amount that was collectible in the period

Answer

CEI measures what percentage of available receivables were collected in a period, providing a more accurate view of collection performance than DSO when sales fluctuate.

CCE - Certified Credit Executive Practice Test

CCE - Certified Credit Executive Practice Test

CCE Trade Credit & Accounts Receivable Management 2