Accounts Receivable Management

Question 1

Identify the general credit-related factors that must be determined by an entity if it sells on account.

Answer 1

1. Total period fro which credit will be extended for sales on account
2. Discount terms, if any, granted for early payment of credit sales
3. Penalty for failure to pay according to credit terms
4. Nature and extent of documentation required for sales on account

Question 2

Identify two major approaches to determining a customer’s creditworthiness.

Answer 2

1. Use of credit-rating service

2. Financial analysis of prospective credit customer

Question 3

Describe an aging of accounts receivable schedule.

Answer 3

A schedule which shows for each credit customer how long each amount due from the customer has been owed. For example, amounts may be classified as being: not due, 1-30 days overdue, 31-60 days overdue, 61-90 days overdue, over 90 days overdue.

Question 4

Identify some measures (averages and ratios) useful in assessing accounts-receivable management.

Answer 4

1. Average collection period
2. Day’s sales in accounts receivable
3. Accounts receivable turnover
4. Accounts receivable to current or total assets
5. Bad debt to sales

Question 5

Describe the accounts-receivable management function.

Answer 5

Management functions concerned with the conditions leading to the recognition and collection of accounts receivables.