CCM CCM Trade Credit & Accounts Receivable 1 — Questions and Answers
Question 1: Trade credit is BEST defined as:
- A bank loan extended to a business
- Credit extended by one business to another for the purchase of goods or services (Correct answer)
- A consumer revolving credit line
- A government-backed export credit facility
Correct answer: Credit extended by one business to another for the purchase of goods or services
Trade credit is the deferred payment arrangement between a seller and a buyer in a business-to-business transaction.
Question 2: Which of the following BEST describes 'open account' terms in trade credit?
- Goods are shipped only after full payment is received
- Goods are shipped and invoiced with payment expected within an agreed period (Correct answer)
- A letter of credit secures every shipment
- Payment is made only at the end of the year
Correct answer: Goods are shipped and invoiced with payment expected within an agreed period
Open account terms ship goods on invoice with payment expected by a due date, relying on trust and the buyer's creditworthiness.
Question 3: What is the primary advantage of factoring accounts receivable for a seller?
- It eliminates the need for a credit department
- It converts receivables to immediate cash, improving liquidity (Correct answer)
- It guarantees zero bad debt losses
- It permanently transfers customer relationships to the factor
Correct answer: It converts receivables to immediate cash, improving liquidity
Factoring accelerates cash flow by selling receivables at a discount, providing immediate working capital.
Question 4: A 'recourse' factoring arrangement means:
- The factor bears all credit risk on purchased invoices
- The seller must buy back uncollected invoices from the factor (Correct answer)
- The buyer is notified of the factoring arrangement
- The factor charges no fees
Correct answer: The seller must buy back uncollected invoices from the factor
In recourse factoring, the seller retains the credit risk and must repurchase invoices the factor cannot collect.
Question 5: Which document serves as legal evidence of a buyer's obligation to pay in a trade credit transaction?
- Purchase order
- Invoice
- Promissory note or trade acceptance (Correct answer)
- Shipping manifest
Correct answer: Promissory note or trade acceptance
A promissory note or trade acceptance is a legally enforceable instrument acknowledging the buyer's obligation to pay a specific sum.
Question 6: The Uniform Commercial Code (UCC) Article 9 is relevant to trade credit because it governs:
- International trade finance rules
- Secured transactions and the perfection of security interests in personal property (Correct answer)
- Sales tax collection on B2B transactions
- Credit reporting agency standards
Correct answer: Secured transactions and the perfection of security interests in personal property
UCC Article 9 governs secured transactions, which is critical when a credit manager takes a security interest in a buyer's assets as collateral.
CCM CCM Trade Credit & Accounts Receivable 1
Trade credit is BEST defined as: