Credit Risk Evaluation Flashcards
7 cards from real CCM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Credit Risk Evaluation flashcards as text
Which element of the 'Five Cs of Credit' evaluates the economic environment and industry conditions?
Answer: Conditions
Conditions refers to external factors such as the economic climate, industry trends, and market conditions that may affect a borrower's ability to repay.
A credit analyst notices a customer's accounts payable days have increased from 45 to 90 over two years. This most likely indicates:
Answer: The company may be stretching payables due to cash flow stress
A sharp increase in payable days often signals that a company is delaying supplier payments due to cash flow difficulties, a red flag in credit evaluation.
Under the Uniform Commercial Code (UCC), a 'perfected security interest' provides a creditor with:
Answer: Priority claim over the collateral against other creditors
Filing a UCC-1 financing statement perfects a security interest, giving the creditor a priority claim over the specified collateral in the event of default or bankruptcy.
Which ratio is most useful for assessing a company's ability to service its debt from operating earnings?
Answer: Interest coverage ratio (EBIT/Interest expense)
The interest coverage ratio measures how many times a company's operating earnings can cover its interest expense, directly assessing debt service capacity.
A guaranty agreement differs from a surety agreement primarily because:
Answer: A guarantor's obligation is secondary and conditional, while a surety's is primary and unconditional
A guarantor is only liable after the primary debtor defaults, whereas a surety is co-equally liable from the outset and the creditor can pursue either party immediately.
Credit scoring models used for commercial credit evaluation typically weigh which factor most heavily?
Answer: Payment history and timeliness of past obligations
Payment history is consistently the most heavily weighted factor in commercial credit scoring as it is the strongest predictor of future payment behavior.
A company reports net income of $200,000 but negative cash flow from operations of -$150,000. This divergence most likely indicates:
Answer: Aggressive accrual accounting or working capital deterioration
Positive net income alongside negative operating cash flow is a red flag suggesting earnings quality issues, potentially from aggressive accruals or a buildup of receivables and inventory.