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
For credit management purposes, Z-scores (Altman's model) are used to:
Answer: Predict the probability of a company experiencing financial distress or bankruptcy within two years
Altman's Z-score model combines financial ratios into a single score to assess the likelihood of corporate financial distress or bankruptcy; scores below certain thresholds indicate high distress risk.
The credit cycle in a business begins with:
Answer: Granting credit to a customer
The credit cycle starts when credit is granted to a customer (credit limit set, order placed), then the invoice is raised, the payment chase cycle begins if not paid by the due date, cash is collected, and any bad debts are written off.
An individual voluntary arrangement (IVA) differs from bankruptcy because:
Answer: An IVA is a formal agreement between an individual and their creditors to repay debts over a period, avoiding bankruptcy while still providing some creditor recovery
An IVA is a formal insolvency procedure for individuals where an insolvency practitioner facilitates an agreement with creditors, typically involving partial debt repayment over 5 years — it avoids the restrictions of bankruptcy.
Pre-delivery credit checks are important because:
Answer: They confirm, immediately before despatch, that the customer's credit limit has not been exceeded and the account is not on hold, preventing despatch to customers who are already overdue
Pre-despatch credit checks ensure goods are not sent to customers who have exceeded their credit limit, have outstanding overdue balances, or whose account is on credit hold — preventing further exposure on already-risky accounts.
Under the Consumer Credit Act 1974, businesses extending credit to consumers must:
Answer: Be authorised by the Financial Conduct Authority (FCA) and comply with consumer credit regulations including APR disclosure
The Consumer Credit Act 1974 (as amended) regulates consumer credit agreements; businesses lending to consumers must be FCA-authorised and comply with requirements including accurate APR disclosure, cooling-off periods, and fair dealing obligations.
A guarantor for a loan or trade credit facility:
Answer: Provides a secondary promise to pay the debt if the primary debtor defaults — reducing the creditor's risk
A guarantor gives a personal (or corporate) guarantee to pay the creditor if the main borrower/customer defaults; the guarantee provides the creditor with a secondary source of repayment, reducing credit risk.