CCM CCM Trade Credit & Accounts Receivable 2 — Questions and Answers
Question 1: What does 'days sales outstanding' (DSO) measure?
- The number of days inventory is held before sale
- The average number of days it takes to collect payment after a sale (Correct answer)
- The number of days before a credit application is approved
- The average age of the company's fixed assets
Correct answer: The average number of days it takes to collect payment after a sale
DSO calculates the average collection period for receivables, reflecting how efficiently the company converts sales to cash.
Question 2: A Best Possible DSO (BPDSO) calculation is used to:
- Determine the worst-case collection scenario
- Measure the theoretical minimum DSO if all customers paid exactly on time (Correct answer)
- Calculate the maximum credit limit for each customer
- Set the company's target profit margin
Correct answer: Measure the theoretical minimum DSO if all customers paid exactly on time
BPDSO represents the DSO achievable if every invoice were paid exactly on its due date, serving as a benchmark for efficiency.
Question 3: Which of the following would INCREASE a company's DSO?
- Customers paying invoices early
- A rise in past-due receivables relative to sales (Correct answer)
- Faster invoice processing
- A reduction in credit terms from net 45 to net 30
Correct answer: A rise in past-due receivables relative to sales
Rising past-due balances inflate the receivables balance relative to daily sales, which increases DSO.
Question 4: A cash application process in accounts receivable is responsible for:
- Approving new credit applications
- Matching customer payments to open invoices accurately and timely (Correct answer)
- Generating new invoices for completed sales
- Negotiating payment terms with customers
Correct answer: Matching customer payments to open invoices accurately and timely
Cash application posts incoming payments to the correct invoices, keeping the AR ledger accurate for collections and reporting.
Question 5: A credit manager is evaluating a potential bad debt reserve. This reserve is BEST described as:
- Cash set aside in a bank account for uncollected receivables
- An accounting estimate of receivables that will likely not be collected (Correct answer)
- A penalty charged to customers who pay late
- A fund to reimburse the sales team for lost commissions
Correct answer: An accounting estimate of receivables that will likely not be collected
A bad debt reserve (allowance for doubtful accounts) is an estimated contra-asset account matching expected uncollectible receivables against revenue.
Question 6: Which of the following is a common method for calculating the allowance for doubtful accounts?
- Flat rate applied to total fixed assets
- Percentage of sales method or aging of receivables method (Correct answer)
- Total payroll as a percentage of revenue
- Annual audit cost divided by accounts receivable
Correct answer: Percentage of sales method or aging of receivables method
The percentage of sales method and the aging of receivables method are the two standard approaches for estimating uncollectible amounts under GAAP.
CCM CCM Trade Credit & Accounts Receivable 2
What does 'days sales outstanding' (DSO) measure?