Certified Financial Management Specialist Practice Exam

What does accounts receivable represent?

1. Cash on hand for operations

2. Money a company owes to suppliers

3. Money owed to a company by customers

4. Assets owned outright by the company

The correct answer is: Money owed to a company by customers

Accounts receivable represents money owed to a company by its customers for goods or services that have been delivered but not yet paid for. This financial metric is critical because it indicates the liquidity of a company; effectively, it reflects pending cash inflows that affect the company's cash flow and overall financial health. Companies often extend credit terms to customers to encourage sales; however, this also means they are relying on customers to fulfill their payment obligations within the agreed timeframe. Monitoring accounts receivable is essential for effective cash management and working capital management. The other options don't adequately define accounts receivable. Cash on hand for operations relates to liquid assets that a company can readily use, but it does not include outstanding payments from customers. Money a company owes to suppliers refers to accounts payable, which is the opposite of accounts receivable. Assets owned outright by the company pertain to various forms of ownership but exclude the principle underlying accounts receivable, which focuses specifically on amounts expected to be received from customers.