Accounts Receivable Unit 3

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Questions and Answers

Why is timely invoicing important for accounts receivable management?

It allows customers to pay without delays.

It improves cash flow by reducing payment time. (correct)

It minimizes the risk of legal issues.

It helps in resolving discrepancies faster.

What should be done when a customer indicates a problem with an invoice?

Ignore the issue and wait for the due date.

Authorize partial payments if possible. (correct)

Terminate the relationship with the customer.

Adjust the terms of the invoice.

What is a recommended strategy for handling customers with a history of late payments?

Increase the grace period for payments.

Limit the number of purchase orders they can make.

Eliminate stringent payment terms.

Start collection efforts before the due date. (correct)

What should companies do regarding purchase orders to avoid future complications?

Ensure salespersons review the purchase orders thoroughly. Signup and view all the answers

What effect does applying cash the same day the payment is received have on collections?

It allows collectors to focus on unpaid accounts. Signup and view all the answers

What approach should be taken with accounts receivable policies to improve cash flow?

Periodically review and adjust policies as needed. Signup and view all the answers

If a company has been giving a grace period on discounts, what action should they consider?

Reduce or eliminate the grace period. Signup and view all the answers

Why is it essential to resolve discrepancies quickly in accounts receivable?

To prevent delayed payments from customers. Signup and view all the answers

What should be carefully considered when confirming purchase orders?

Verifying all terms included in the purchase order. Signup and view all the answers

Why do many companies accept a certain level of bad debts?

It is considered part of doing business. Signup and view all the answers

How should a company respond when the economy is in a recession?

Tighten credit policies or increase bad-debt reserves. Signup and view all the answers

What is a common tactic used by buyers when placing orders via telephone?

They may send a written confirming purchase order with altered terms. Signup and view all the answers

What is the relationship between bad debts and credit policies during favorable economic conditions?

Bad-debt reserves are increased while credit policies are loosened. Signup and view all the answers

What is a potential risk when a seller includes terms in small print on a purchase order?

Terms may be unnoticed and thus accepted by default. Signup and view all the answers

Which of the following accurately reflects the consequence of having no bad debts?

It indicates a company is potentially missing out on sales opportunities. Signup and view all the answers

What is a key consideration for accounts receivable professionals regarding purchase orders?

They should thoroughly monitor and verify all terms in purchase orders. Signup and view all the answers

What is the primary reason for an accounts receivable professional to have difficulty applying cash to outstanding invoices?

Payments do not match any outstanding invoices. Signup and view all the answers

What should be done after the second unauthorized deduction by a customer?

Issue a warning and discuss the issue. Signup and view all the answers

What is required for automated clearinghouse debits to be processed?

They must be preauthorized in writing. Signup and view all the answers

What is one suggested way to communicate with customers to reduce unauthorized deductions?

Involve the sales department in discussions. Signup and view all the answers

What is the primary difference between automated clearinghouse credits and debits?

Credits are originated by the payor, whereas debits are originated by the payee. Signup and view all the answers

What action can be taken to prevent customers from making unauthorized deductions?

Implement stickers on invoices directing customers to contact the vendor. Signup and view all the answers

What is one of the suggestions for dealing with customers who repeatedly take unauthorized deductions?

Personally visit the worst offenders to understand their issues. Signup and view all the answers

What is an example of an unearned discount?

A customer pays 98% of the invoice if paid within ten days. Signup and view all the answers

What is a potential outcome when customers realize deductions are not permitted without justification?

Only justified deductions are likely to decrease. Signup and view all the answers

What causes the biggest headaches for credit and collection professionals?

Unauthorized deductions. Signup and view all the answers

Which of the following is NOT an effective general tip for handling unauthorized deductions?

Refrain from communicating with customers regarding deductions. Signup and view all the answers

Which of the following is NOT a common reason for unauthorized deductions?

Late payment fees. Signup and view all the answers

What benefit can be gained from implementing improved procedures for customer returns?

It can reduce confusion and unauthorized deductions. Signup and view all the answers

How does a 2/10 net 30 discount affect a company's return?

It offers a return in excess of 36% for payments made within the discount period. Signup and view all the answers

What characterizes an authorized deduction as opposed to an unauthorized one?

Authorized deductions come from contractual agreements. Signup and view all the answers

What impact can unearned discounts have on a company's cash flow?

They can delay cash flow due to late payments from customers. Signup and view all the answers

What is a common method for calculating a reserve for bad debts?

Calculating a percentage of sales or outstanding accounts receivable Signup and view all the answers

Why is it important to call customers early about late payments?

To promptly identify and address potentially unstable financial situations Signup and view all the answers

What strategy can help in reducing bad-debt write-offs?

Maintain open communication channels with sales and credit teams Signup and view all the answers

What is the underlying principle of the technique 'follow up, follow up, follow up'?

To deter customers from making late payments through constant reminders Signup and view all the answers

What factor might complicate the calculation of bad-debt reserves?

Variable industry conditions Signup and view all the answers

What is a potential risk if delays occur in contacting customers about overdue accounts?

Customers may encounter financial difficulties that worsen over time Signup and view all the answers

How can credit managers effectively reduce their bad-debt write-offs?

By implementing proactive communication strategies and frequent follow-ups Signup and view all the answers

Which of the following could weaken the relationship between credit and sales teams?

Reduced communication about customer risks Signup and view all the answers

Study Notes

Accounts Receivable Issues

Accounts receivable is a large asset for many businesses.
Timely invoicing leads to faster payments.
Invoice accuracy should be prioritized without delaying payment.
Offer stricter payment terms for new clients and during annual reviews.
For customers with late payment history, collection efforts should begin before the due date.
Grace periods for discount payments should be reduced or eliminated.
Discrepancies should be resolved promptly for payment.
Partial payments can be authorized for an invoice with customer disputes.
Customer problems should be logged and analyzed for process improvement.
Cash should be applied the same day received.

Dealing With Purchase Orders

Salespersons should be careful about purchase orders containing clauses that could lead to future problems.
Confirming purchase orders may include additional terms not agreed upon orally.

Bad-Debt Reserves

Bad debts are expected and companies will have a reserve allowance for them.
Companies with no bad debts indicate they may not be maximizing sales.
Economic changes impact bad debt and reserves.
Reserves should be increased in recessions and decreased when the economy improves.
There is no set method for calculating bad-debt reserves.

How to Reduce Your Bad-Debt Write-Offs

Early calls to customers improve chances of collecting payments.
Communication between sales and credit teams can help avoid bad debts when a customer is experiencing financial difficulty.
Regular follow up with customers encourages timely payments.

Automated Clearinghouse Credits and Debits

Automated clearinghouse credit payments are initiated by the payor and require preauthorization.
Automated clearinghouse debits are initiated by the payee, require written preauthorization from the receiver.

Handling Deduction Issues

Unearned discounts are discounts offered for early payments, but taken without meeting the criteria.
Unauthorized deductions may include short shipments, damaged goods, or missing documentation.
Customers should provide detailed remittance advice outlining reasons for deductions.

Ways to Eliminate Deduction Problems

First-time deduction offenses can be ignored, warnings can be issued for subsequent offenses, and deductions can be billed back after that.
Improved return procedures should be implemented for customers.

General Deduction Advice

Customers should be informed about payment requirements.
A credit memo policy should be implemented.
Stickers on invoices reminding customers to call for deductions will help minimize unauthorized deductions.
A deduction system should be implemented for follow-up calls.

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Description

Test your knowledge on managing accounts receivable efficiently. This quiz covers important topics such as timely invoicing, handling purchase orders, and addressing bad debts. Assess your understanding of credit control and payment terms for improving cash flow within a business.