Accounts Receivable Interview Questions and Answers

Accounts receivable is also known as trade receivable. Accounts receivable is a current asset account in which a company records the amounts it has a right to collect from customers who received goods or services on credit.

The Accounts Receivable cycle usually involves a straightforward process for alerting customers and clients about the money they owe. A standard Accounts Receivable workflow includes the following steps.

The initial agreement or sales conversation

Reminders at set intervals for outstanding invoices

The creation of an invoice with a specific due date

Updating the accounting software to reflect payments that have been received

The main purpose of the ratio is to measure the amount of time it takes for a company to collect their accounts receivables on an average basis. It can be used to determine if a company is having difficulties collecting sales made on credit.

Formula:

Turnover Ratio = Net Sales/ Average Net Receivables.

The day’s sales in accounts receivable ratio means the number of days it took on average to collect the company’s accounts receivable during the past year. It is also known as the average collection period.

It refers to a prepayment for services or products recorded on a company’s balance sheet. Deferred revenue counts as a liability.

It is an important step in the accounting process that provides an internal control for businesses and organizations.

Inventory Turnover is a ratio measuring the number of times that a company has replaced its inventory balance in a specific period. A company’s inventory turnover is often expressed as the company’s cost of goods sold (COGS) for a year divided by the average cost of inventory during the same year. The result of this calculation is the inventory turnover ratio.

Inventory Turnover = COGS / Average Inventory

The reorder point is the quantity of units in inventory at which time an order should be placed to purchase additional units.

The term bad debts usually refer to accounts receivable (or trade accounts receivable) that will not be collected. Or  A bad debt is money somebody owes that the creditor clearly identifies as not being collectible.

The factor is a financial company or bank that purchases receivables from businesses and then collects payments directly from customers.

The 13-point average for inventory for the calendar year 2022 would be the sum of the following: (the inventory amount at December 31, 2021 + the 12 end-of-the-month amounts in 2022) divided by 13.

The Operating Cycle tracks the number of days between the initial date of inventory purchase and the receipt of cash payment from customer credit purchases. The Operating Cycle is used to calculate accounts receivable turnover, inventory turnover, average collection period (accounts receivable days), and average payment period (inventory days).

Operation Cycle = Days inventory Outstanding + Days Sales Outstanding

The Working Capital Turnover is a ratio that compares the net sales generated by a company to its net working capital (NWC).

Working Capital Turnover Ratio = Net Sales / NWC

The average collection period is the average number of days it takes a business to collect and convert its accounts receivable into cash.

The formula for calculating average collection period is:

Average collection period = (accounts receivable / sales) x number of days in a year

(Or)

Average collection period = 365 days/ accounts receivable turnover ratio.

After 90 days of the due date

Goodwill in accounting refers to an intangible asset. It occurs when one enterprise buys another business and spends a higher price for it when compared to the net assets of the company they are buying.

Trade receivables are amounts owed by customers for goods and services sold in the course of a firm’s ordinary business (trading) activities, including all accounts receivable and all notes receivable resulting from trade activities.

Trade Receivables = Debtors + Bill Receivables

Some examples of nontrade or other receivables include:

Interest receivable

Income tax receivable

Receivables from employees

Insurance claims receivable

Interest Receivable,

loans to company officers

advances to employees

 Income taxes refundable.

Credit Sales of goods and services.

Two bases are used to estimate the allowance: (1) percentage of sales and (2) percentage of receivables.

The Direct write-off method.

It is the analysis of customer balances by the length of time they have been unpaid.

Operating Assets are necessary to a company’s ongoing core operations and directly support the continued generation of revenue and profits.

Operating Assets, net = Total Assets – Non-Operating Assets

Common examples of operating assets include the following:

Property, Plant & Equipment (PP&E)

Accounts Receivable (A/R)

Inventory

Recognized Intangible Assets (e.g., Patents, Intellectual Property)

Assignment of accounts receivable is an agreement in which a business assigns its accounts receivable to a financing company in return for a loan. It is a way to finance cash flows for a business that otherwise finds it difficult to secure a loan, because the assigned receivables serve as collateral for the loan received.