Credit Management Flashcards
6 cards from real AAT L4 practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Credit Management flashcards as text
The 'five Cs of credit' framework for assessing creditworthiness includes character, capacity, capital, conditions, and:
Answer: Collateral
The five Cs of credit are: Character (integrity and willingness to pay), Capacity (ability to repay from cash flows), Capital (financial strength), Conditions (economic/industry environment), and Collateral (security offered).
A debenture is a form of security given by a company to a lender that:
Answer: Creates a fixed or floating charge over the company's assets as security for the debt
A debenture is a document evidencing a company's indebtedness to a lender, typically secured by a fixed charge (specific assets) and/or floating charge (all assets) — providing the lender with security if the company defaults.
When a customer becomes insolvent and enters administration, the credit manager should:
Answer: Stop all further credit supply and register the debt with the administrator as an unsecured creditor as soon as possible
On insolvency, the business should: stop further credit supply immediately, enforce any retention of title rights, and submit a proof of debt with supporting documentation to the administrator promptly to maximise recovery prospects.
Under the Insolvency Act 1986, which of the following categories of creditor is paid FIRST in a liquidation?
Answer: Secured creditors with a fixed charge
The order of priority in liquidation: (1) fixed charge holders, (2) liquidator's expenses, (3) preferential creditors (employees' wages, pension contributions), (4) floating charge holders, (5) unsecured creditors, (6) shareholders. Fixed charge holders rank first.
Debt factoring provides immediate liquidity because:
Answer: The factor advances a percentage (typically 70–90%) of the face value of invoices immediately, before customers have paid
Invoice factoring: the factor advances typically 70–90% of invoice value on the day the invoice is raised. When the customer pays (or after the recourse period), the factor remits the balance less their fees.
The purpose of a credit policy document is to:
Answer: Provide a consistent framework governing credit limit decisions, payment terms, collection procedures, and escalation processes
A credit policy sets out the business's approach to credit management — who can authorise credit, at what levels, the criteria for credit assessment, standard payment terms, collection procedures, and escalation steps — ensuring consistent and controlled decision making.