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 primary objective of a credit management function is to:
Answer: Manage credit risk to maximise profitable sales while minimising bad debts and overdue collections
Credit management balances the commercial need to make sales on credit against the financial risk of non-payment — the goal is profitable revenue growth with acceptable levels of credit risk, overdue debt, and bad debt.
A credit scoring model is used to:
Answer: Assess the creditworthiness of a new customer by systematically scoring key risk factors to determine whether and how much credit to offer
Credit scoring models assign numerical scores to risk factors (e.g., years in business, payment history, financial ratios, credit agency data), producing an overall score to support objective credit limit decisions.
Which of the following documents is used to assess the financial health of a potential trade credit customer?
Answer: The customer's most recent audited financial statements and credit agency report
Assessing credit risk involves reviewing financial statements (to evaluate liquidity, gearing, and profitability), credit agency reports (payment history, CCJs, credit score), bank references, and trade references from other suppliers.
A retention of title clause (Romalpa clause) in a contract:
Answer: Means ownership of goods does not pass to the buyer until full payment is made, allowing the seller to reclaim goods in a buyer's insolvency
A retention of title (ROT) clause retains legal ownership with the seller until the buyer pays in full; if the buyer becomes insolvent before paying, the seller can reclaim identifiable goods from the insolvency estate.
The role of a credit insurance policy in credit management is to:
Answer: Protect the business against bad debt losses on insured customers up to a policy limit
Credit insurance provides compensation (up to the insured limit) when an insured debtor fails to pay due to insolvency or protracted default, protecting the business against bad debt losses on major customer accounts.
A personal guarantee from a company director is sought because:
Answer: It makes the director personally liable for the company's debt if the company cannot pay, providing additional security
A personal guarantee creates a personal contractual obligation on the director/guarantor to pay the debt if the company defaults; it is particularly sought when the company has limited assets or a weak balance sheet.