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chap2 Flashcards

1
Q

T/F

bad debt can be eliminated

A

F, it cannot. but can be avoided and minimized

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2
Q

T/F

capacity bias rather than mere character bias

A

T

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3
Q

give 8 credit & collection principles and practices

A
  1. credit is earned; and a privilege, not a right
  2. credit must be granted only to persons possessing the positive traits
  3. credit must not be extended to one who is habitual delinquent
  4. each credit applicant must properly be credit investigated and evaluated
  5. credit grants must not be motivated and granted principally by reason of the collateral or security offered
  6. set a workable system for monitoring, evaluating, and expeditious action
  7. the credit & collection and sales operations must be in positive synergy to attain overall objectives
  8. don’t cry over spilled milk. take your loss, write off the bad account, & learn from your negligence
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4
Q

give 6 questions in developing credit & collection system or policies

A
  1. what is the policy’s philosophy or rationale?
  2. should credit policies and procedures be liberal or conservative?
  3. is the system suited to the industry to which you belong?
  4. what products & services do you sell and how should u sell these on credit?
  5. what market share do u want to attain?
  6. what kind of competitions you have?
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5
Q

who should be the benchmark?

A

leading industry

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6
Q

2 types of credit policy and procedure

A

liberal credit policy
conservative/restrictive credit policy

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7
Q

credit policy without background checks thus have freedom

A

LIBERAL CREDIT POLICY

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8
Q

credit policy with background checks

A

CONSERVATIVE/RESTRICTIVE CREDIT POLICY

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9
Q

objective of establishing credit policies

A

to maximize sales
to minimize costs and bad debt losses

to attain profit or income objectives

for control/incentive

for sustainability and growth

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10
Q

factors to consider in formulating credit & collection policies

A

capital
competition
product or service
kinds of customer or target market

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11
Q

up to what extent can the capital of a company service or support the receivables?

A

CAPITAL

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12
Q

up to what extent / period do the players in the market give to the customers?

A

COMPETITION

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13
Q

does ur product/service lead or lag in its market?

A

PRODUCT OR SERVICE

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14
Q

the class of customers or the market of ur product / service

A

KINDS OF CUSTOMER / TARGET MARKET

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15
Q

3 kinds of customer

A

high = maharlika
middle = aliping namamahay
low = aliping saguigulid

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16
Q

4 credit & collection policy equation

A

liberal credit policy complemented by strict collection policy

strict = liberal
liberal = liberal
strict = strict

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17
Q

identify if liberal or restrictive

high overhead cost
high advertising & promotion expenses

opening new accounts
developing a market for a new product/service

competitive market
sunset market
heavy abnormal obsolete inventory
selling season not financially strong enough to carry ur inventory to the next year

A

liberal

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18
Q

identify if liberal or restrictive

more demand for ur product than ur ability to produce

inventory is low

general economic condition is unfavorable

Business conditions among your customers are slumping badly

A

restrictive credit policy

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19
Q

T/F

The credit policies you devised must not be flexible.

A

F, it must be flexible

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20
Q

Your sales, credit, and collection records showing relationships between _____ and _____ may
be the starting point to amend your credit policies to adjust to the prevailing condition.

A

total sales
credit sales

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21
Q

the possible two-pronged solutions

A
  1. to be liberal in credit extension;
  2. active promotion of
    credit sales.
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22
Q

Represent an estimated ceiling

A

credit line / limits

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23
Q

T/F

Sharing the credit limit information with the sales operation will result in a more effective salesmarketing positive synergy:

A

TRUE

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24
Q

guide in the promotion of sound credit operation

A

credit limit

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25
Q

Advantages of Setting Credit Limits

A

1) It is the overall tool for the control of credit extension, promotion of sound credit practices; and the
effective collection of the accounts.
2) Prevents misunderstanding and confusion within the sales operation and with the customers. Minimize
wasted sales efforts, and provide some degree of discretion for automatic control over the accounts
receivable.
3) It aids in reducing the cost of credit and collection operations; and, contributes to efficiency.
4) Credit limits work as a check against imprudent, reckless buying of customers and their abate
extravagance Imprudence in using credit.

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26
Q

Objections to Credit Limits

A
  1. Difficult to set up and keep current;
  2. Unless kept current, the credit limit is of little value,
  3. Facts and figures are difficult to gather from different sources;
  4. Necessitate readjustment every time an order causes an excess in the limits set;
  5. May precipitate loss of rapport with the customers due to frequent discussion of their credit limits;
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27
Q

T/F

credit limits are permanent amounts
but estimates only of one’s capacity to repay for credit obtained

A

F, they are NOT permanent amounts

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28
Q

T/F

It’s necessary to adjust the limit often at short intervals nor necessary to reject an order due to a
slight increase in the credit limit set

A

F, it’s not necessary

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29
Q

T/F

Credit limits exactly reflect the actual capacity of the debtor to repay his credit.

A

F, do not exactly

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30
Q

Why Set Credit Limits

A
  1. To extend credit;
  2. On what terms and conditions shall credit be granted;
  3. Setting or determining a limit to the amount of credit to be extended under the specified terms and
    payment conditions.
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31
Q

are essential because credit is a motivation for an active and profitable sales activity. It is
inherent in the institution of credit as leverage in its administration and control.

A

credit limit

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32
Q

T/F

Bias must be given to the
customer’s present good paying performance; and, the prevailing business, economic condition in
conjunction with a study of the customer’s particular line of business and the type of the business
organization which must be correlated with credit and collection policies of the creditor-seller.

A

F, past & present

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33
Q

T/F

it is not the ultimate payment of the account that is of importance, but
the willingness and capability to pay the credit within the credit term extended that is more important.

A

TRUE

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34
Q

Necessarily, the ______,______, and _____ willingness, and capability of the debtor-customer vis-a-vis potential
conditions are more significant than those which exist

A

past, present, and future

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35
Q

The customers or debtor’s positive debt-paying capacity and ability to pay.

A

financial
approach of setting credit limit.

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36
Q

The positive needs and requirements of the customers-debtors of the merchandise/ service
of the seller-creditor

A

sales approach to setting credit limit

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37
Q

Credit Limit Allocation

A
  1. Keeping tap of creditor’s allocation of credit to its different market businesses and industries.
  2. Rational extension of credit terms to different debtors:
  3. Judicious, timely monitoring of credit danger signals on credit availors.
  4. Effective, timely payment collection performance monitoring
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38
Q

Ways to Set Credit Limits

A

financial approach
sales approach

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39
Q

Methods to Determine Credit Limits

A

Credit limit granted arbitrarily

Credit Limit based on the debt-paying capacity of the debtor/ customer.

assigning a limit either as a fixed amount on a certain credit
rating bracket as ascertained in a credit scorecard or, as a percentage of the capital rating done by a reputable, credible rating company. When this latter method is used, the procedure adopted is to
allow a credit limit equivalent to a certain percentage of the capital rating figure of a credit rating
company.

the net working capital method (current assets minus
current liabilities) or net assets. Net current assets are divided by the number of the customer’s
principal suppliers/ creditors. The presumption under this method is that the net current assets
measure the debtor’s ability to pay within the credit term or period; and, that he is granted credit or
buys from the creditors or sellers used as divisors.

Credit Limit Based on Customer’s/Debtor’s Requirements

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40
Q

suggested method of computing credit limit

A
  1. based on customer requirement
  2. credit limit computed on debtor’s paying capacity
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41
Q

setting small credit limits

A

assigning credit limits on retail account

credit limit for installment or deferred payment

credit limit for revolving credit

credit limit from lending institutions for borrower

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42
Q

other guides in setting up credit lines/limits

A

normal requirement

credit line based on size of order

credit line based on outstanding balance

credit line for a specified time period

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43
Q

Based principally on the customer’s financial responsibility and payment performance in relation with
his needs. Under this method, emphasis is on the purchasing patterns, rather than the payment performance,
implicitly assuming that payment for normal purchases will be made within the term granted.

A

Normal Requirement

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44
Q

The term ______ must be fully explained, experienced and understood from the
customer’s performance; so that, substantial and financially sound customers can be sold on credit under this
term.

A

normal requirement

45
Q

Credit lines are generally established in relation with the total balance outstanding or the total amount
of order placed within a given period

A

credit line based on size of order

46
Q

Lines intended to bring about referral of orders when the total outstanding balance exceeds the line, require
complete records of unpaid invoices and/or orders approved but not yet shipped

A

credit line based on outstanding balance

47
Q

A credit line may also be based on the total amount ordered which can be approved during a given period
of time

A

credit line for a specified time period

48
Q

In arriving at a decision regarding an order which exceeds the customer’s limit, the two most important
considerations are

A

Will you be paid?” and “If so, when?”

49
Q

sometimes interpreted as the maximum amount of credit the company is willing to
extend, the ceiling above which the risk is too great to accept

A

credit lines

50
Q

credit line is usually called

A

credit limit

51
Q

refers to the credit extended to the sellers and buyers of goods and
services for resale in the same, modified or for use in the conduct of their business enterprise.

A

Mercantile or commercial credit

52
Q

The primary function of mercantile or commercial credit is

A

to finance goods via the channels of trade,
principally as a matter of necessity governed by customs, practices and, by the need of customers for such
medium of financial assistance.

53
Q

often considered productive in contrast with consumption credit which generally
satisfies the needs, wants and desires of the customer - debtor

A

mercantile credit

54
Q

Arrangements between buyer and seller which specify the conditions required in payment for goods
or services are known as terms of sale

A

credit period / term

55
Q

Factors that determine the length of time to extend for the repayment of the credit

A

rate of turnover

Location of Customers and Transportation Facilities.

Term of Sale Granted by Other Sellers

Competitive Strategy

Character of the Merchandise

Quantity Involved

Classes of Customers

Nature of the Credit Risk

Sectoral Differences in Income Level

The Biases/Prejudices of the Credit Manager

Prompt Payment/ Rebate or Cash Discount

56
Q

the period of time from the purchased of the goods on
credit and its conversion to receivable or cash

A

turnover period

57
Q

Generally granted to motivate, induce a purchaser/debtor to pay within a shorter period of time than up to
the whole length of the credit period granted. Its a payment for a credit before its due date.

A

Prompt Payment/ Rebate or Cash Discount

58
Q

require payment by the customer before or at the time the merchandise is
delivered.

A

PRE-PAYMENT TERMS

59
Q

This term are the most severe from buyer’s
standpoint and result in the seller’s assuming little or no risk

A

Cash with Order (C.W.O.) or Cash in Advance (C.I.A.)

60
Q

terms are only slightly less severe than cash with order
arrangements

A

Cash before Delivery (C.B.D.)

61
Q

merchandise is shipped but is not released to the
customer until the carrier company has received payment for the full invoice amoun

A

Cash on Delivery (C.O.D.)

62
Q

another type of arrangement that specifies payment in the month
following shipment.

A

Proximo Term

63
Q

Proximo, abbreviated prox., is Latin for

A

next” or “next following

64
Q

are sometimes allowed under proximo term, meaning that a deduction may be
taken from the face of the invoice when the bill is the end of the net credit period; but, after the cash
discount period.

A

anticipation discounts

65
Q

pre-paymenr terms

A

CASH IN ADVANCE
CASH BEFORE DELIVERY
CASH ON DELIVERY

66
Q

special dating payment terms

A

SEASONAL DATING
RECEIPT OF GOODS
EXTRA DATING
CONSIGNMENT

67
Q

Where demand for a product is seasonal, sellers encourage off-season purchases by
granting terms which postpone payments to coincide with buyers’ selling seasons.

A

SEASONAL DATING

68
Q

Terms of this type permit the buyer to compute the cash discount period
from the date on which the merchandise is received rather than from the invoice date

A

RECEIPT OF GOODS

69
Q

found primarily in the textile industry, extend the discount
period to coincide with a relatively long credit period.

A

EXTRA DATING

70
Q

add a warehousing feature to payment provisions.

A

CONSIGNMENT

71
Q

motivated by fear that unstable economic conditions would affect the
seller’s ability to collect before the credit term or it may serve as an incentive for debtor to pay in advance

A

CASH DISCOUNT

72
Q

T/F

Cash discount rates have relation to current interest rates;

A

F, have no little relation

73
Q

is a premium which the seller is willing to pay for certain benefits that accompany prompt
collection of his funds

A

CASH DISCOUNT

74
Q

generally used to have an edge over competitors, to encourage customers to buy more.

A

DISCOUNTS

75
Q

payment for customer purchases within a specified period encourages them to pay earlier than their
usual term to afford them better cash flow.

A

REBATE

76
Q

COST OF CREDIT

A

Administrative cost in running the department;
• The cost of financing the accounts receivable;
• The credit losses due to delinquent or bad accounts;

77
Q

Generally, the costs of offering credit are:

A

Credit evaluation costs; which consists of credit investigation and data processing
2. Discounts in payment

78
Q

COST OF CREDIT (EXPENSES)

A

Investment in Receivables
Collection Expenses
Bad Debt Expense

79
Q

computed for the net cash flow of each of the alternatives under consideration

A

PRESENT VALUE

80
Q

permits a buyer to take advantage of discounts that he may otherwise
be unable to earn

A

BANK FINANCING

81
Q

ACCEPTABLE PAYMENTS

A

CASH
CHECK
PAYMENT IN KIND OR SERVICE
PAYMENT FROM SURETY OR GUARANTY PAYMENT BOND
JOINT AND SEVERAL OBLIGOR (DEBTOR)

82
Q

WAYS TO FORTIFY / SECURE CREDIT

A

JOINT AND SEVERAL (SOLIDARY) OBLIGATION

REAL ESTATE MORTGAGE

PARI-PASSU ARRANGEMENT

CHATTEL MORTGAGE

PLEDGE

SURETY

GUARANTY

ASSIGNMENT

ESCROW ARRANGEMENT

LETTER OF CREDIT

TRUST RECEIPT FACILITY

HOLD OUT AGREEMENT

SURETY BOND

TRUSTEESHIP AGREEMENT

83
Q

literally means that a person who agrees to be bound under such a mode, answers
personally and directly for the obligations created under the contract.

A

JOINT AND SEVEEAL OBLIGATION

84
Q

JOINT AND SEVERAL Aalso means in the obligation created

A

“in solidium” or “one and the same”

85
Q

the conveyance of a real property as a security for the payment of money or the
performance of some other act, condition to become null and void upon payment or performance of
the obligation created.

A

REAL ESTATE MORTGAGE

86
Q

It literally means; by the same priority. This is used by creditors who, marshaling assets are entitled to
receive out of the same fund or asset without any precedence of each other except as to the direct
proportion of their financial exposures in the credit granted.

A

PARI-PASSU AGREEMENT

87
Q

A conditional sale of personal property as security for the payment of a debt or the performance of some
other obligation specified;

A

CHATTEL MORTGAGE

88
Q

A contract whereby a personal property is delivered to the creditor or a third person as a security for the
performance of an obligation.

A

PLEDGE

89
Q

A contract or an agreement whereby a party called the surety guarantees the performance by another party
called the principal or obligor of an obligation or undertaking in favor of a third party called the obligee. It
includes official recognizance, stipulations, bonds or undertakings issued

A

SURETY

90
Q

A contract whereby a person, called the guarantor, binds himself to the creditor to fulfill the obligations of
the principal debtor in case the latter fails to do so. He is only liable if the principal cannot pay. The
guarantor’s liability is secondary.

A

GUARANTY

91
Q

fundamentally a contract of sale.

A

ASSIGNMENT

92
Q

An agreement whereby a deed or a contract, which may be coupled with monetary consideration, is
delivered to a mutually acceptable stranger or third party with an obligation for the latter to deliver unto
the party in whose favor the deed or agreement is made, upon the occurrence or performance of certain
condition or obligation.

A

ESCROW AGREEMENT

93
Q

A written instrument from a bank directed to another bank requiring that the latter bank allow the bearer
of the letter of credit (LC) to buy commodities or service or to want money (either to procure the same or
to pass his promise, bill or other engagement for it)

A

LETTER OF CREDIT

94
Q

An arrangement by virtue of which a banker or a creditor advances money to a person for the purchase of
goods; the former taking full title of the goods at the very beginning and continuing to do so until he is paid;

A

TRUST RECEIPT FACILITY

95
Q

A recent credit development that disallows any withdrawal from the debtor’s deposit with the creditor,
banking, or financing institution during the duration of the credit granted.

A

HOLD OUT AGREEMENT

96
Q

It is substantially the same as a suretyship, except that bonds are issued by non-life insurance and bonding
companies

A

SURETY BOND

97
Q

person to whom confidence is reposed as regards property for the benefit of another person

A

TRUSTEE

98
Q

The trustee is given the possession or custody of the property without power to dispose the property as
distinguished from an administrator who is given the incidental power of disposal.

A

TRUSTEESHIP ARRANGEMENT

99
Q

ways on credit limit granted arbitrarily

A

Following the credit limit granted to credit applicants by other creditors or sellers and competitors
within one’s industry.
b. The trial and error (oido) method
c. Based on the average amount of the highest credit granted by others on the same line of business

100
Q

how to compute tangible net worth?

A

TOTAL ASSETS - TOTAL LIABILITIES
= OWNER’S EQUITY

OE - INTANGIBLE ASSETS

101
Q

how to compute net working capital?

A

CURRENT ASSET - CURRENT LIABILITIES

102
Q

T/F

You must not allow the customer-debtor to indirectly fix his credit limit

A

TRUE

103
Q

The steps to compute for a customer’s needs and requirements

A
  1. Determine the customer’s yearly volume of business;
  2. Determine what percentage of customer’s business in your company
    Determine what proportion of the customer’s business you can obtain (say for example, that out of
    P1,200.000 annual business, you may be able to get 50% or P600,000 of such business);
  3. How many days of sale will you grant the customer a credit of 45 days credit term. The credit limit is
    computed by dividing 45 days into 360 days and dividing the result into the amount to be extended
    during the year thus;
    (360 ÷ 45= 8; P600,000÷8 = P75,000 credit limit)
  4. Reduce the credit limit thus determined by the average gross margin of profit on which buyers normally
    sell your product say, at a 30% margin, and you will get approximately P52,500 in credit line.
    Annual sales x percentage in seller’s line percentage in seller’s line, seller expects to obtain x cost of
    goods sold, as percentage of sale divided by average turnover of seller’s accounts receivable
    = Credit Limit substituting the figures in the foregoing illustration, the results are as follows;
    (P2,000.000 x 60% x 50% x 70 % divided by 8 = P52,500 margin)
    Another way to compute a customer’s requirement is to ascertain the cost of goods sold during the year
    obtained from the latest financial statement, which may be regarded as the annual merchandise
    requirements, divided by the customary credit period; to obtain the amount that would be required during
    such time; then, the amount is divided by the number of suppliers to arrive at the credit limit to be set by
    each of the suppliers. If the cost of goods sold is P180,000 for the year, and the general credit term is 60 days,
    the amount needed for such a period is P30,000.00 worth of goods or credit. This amount is divided by say 15
    suppliers, which will result in a credit limit of P2,000.00 each, computed to wit.
104
Q

if silent yung problem about how many days ilan dapat?

A

360 DAYS

105
Q

if sinabing exact date? how many days is that?

A

365

106
Q

ano ano ung mga formula na 360

A

CUSTOMER REQUIREMENT
DEBT PAYING CAPACITY
ANNUAL

107
Q

ano ano ung mga formula na 365 days?

A

EFFECTIVE INTEREST RATE
PRESENT VALUE

108
Q

ano yung mga given sa present value?

A

yung 0.12 tsaka credit term na 45 days

chapt2 C&&C (5 decks)

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