CCP Credit Insurance & Risk Mitigation Flashcards
6 cards from real CCP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 CCP Credit Insurance & Risk Mitigation flashcards as text
A credit professional sets a buyer's credit limit at 10% of the buyer's net worth. This approach is an example of:
Answer: Ratio-based internal credit limit setting
Using a percentage of the buyer's net worth to set credit limits is a common ratio-based internal methodology that ties exposure to the buyer's financial capacity.
What does 'concentration risk' mean in the context of a credit portfolio?
Answer: Excessive exposure to a single buyer, industry, or geography
Concentration risk arises when too large a share of the portfolio is exposed to a single counterparty, sector, or region, making total losses highly correlated with one risk event.
Which internal control best prevents unauthorized credit limit increases that expose a company to unacceptable risk?
Answer: Requiring dual authorization (credit manager + CFO) for limits above a defined threshold
Dual authorization creates a segregation-of-duties control that prevents any single individual from unilaterally approving large credit exposures.
A credit manager reviews the company's bad debt reserve policy. The allowance method is preferred over direct write-off under GAAP because:
Answer: It matches the estimated credit loss expense to the period in which the related revenue was recognized
The allowance method applies the matching principle by estimating and recording bad debt expense in the same period as the revenue, providing a more accurate picture of net realizable receivables.
Which metric best measures the effectiveness of a credit department's risk mitigation efforts over time?
Answer: Bad debt as a percentage of net credit sales (bad debt ratio)
The bad debt ratio (bad debt expense ÷ net credit sales) directly measures how much of revenue is ultimately uncollected, reflecting the quality of credit decisions and mitigation actions.
When a credit insurer reduces or cancels a buyer's approved credit limit mid-policy, the insured seller's BEST response is to:
Answer: Immediately reassess exposure, reduce or halt shipments, and seek alternative security
A limit reduction is an early warning signal from the insurer; the seller should quickly reduce exposure to the newly uncovered amount and explore alternative risk mitigants.