Question

Describe the two-stage process for establishing credit standards.

1. First, the company must establish credit acceptance criteria that represent a maximum amount of payment risk the company is willing to assume.

2. ??

Describe three considerations companies must evaluate when establishing a method of analyzing credit requests.

1. The type of information

2. ??

3. The cost of information

Describe four external sources companies can use to determine the creditworthiness of a credit applicant.

1. ??

2. Trade references, or other companies from whom the applicant has purchased on credit, can provide a secondary source of information about the applicant’s payment performance.

3. Banks or other financial creditors (e.g., commercial finance or leasing companies) can provide standardized credit information about an applicant’s financial condition and available credit.

4.??

Describe the four-step credit scoring process major issuers of retail credit use for consumer credit analysis.

1. Differentiating standard and high-risk accounts based on the applicant’s monthly income, outstanding obligations and employment history

2. Weighting the characteristics of applicants who fit into each category to establish creditworthiness

3. ??

4. Applying further analysis to applicants whose scores fall between the cutoff points

Describe four disadvantages of accepting credit cards for customer financing.

1.??

2. The seller loses promotional opportunities by not having access to a list of credit customers.

3. ??

4.??

Describe four reasons that motivate the holding of inventory.

1. ??

2. As a precautionary measure

3. ??

Answer 1

Ans . 1.

Next step would be establishing credit terms and collection policy.It means firm should take decisions on credit terms like for how much time credit should be granted, what amount of discount should be given and when this discount would not be given .After giving credit, in how much time it should get collected .Deciding on average collection period.

so ,these would be two-stage process of establishing credit standard

2.

A. Type of information - Type of information includes the the general impression of borrower which is to be analysed. the lender analyes the information provided by the borrrower,his background to take lending decision.

B. Cost of information- It includes application and processing fees,interest,principle and other statutory charges to be borne for the information. Borrower evaluates it to compare the cost of information with the return that he would earn by investing credit amount in a project or investment to earn profit.

C. Accuracy of information-It is related to inspecting the information by the lender to get assurance about its credit collection. He will investigate all the information provided to get assurance for payment and minimising risk of bad-debt.

3.

A. Published Financial Statements, balance sheet and the profit ana loss acount contain important information regarding liquidity, profitability and debt capacity.

B. Specialist Credit Bureau also reports about various organisation's creditworthiness by supplying credit information to relevant users.

4.

A. Evaluating the categories of applicants wthether they are accurately placed in each category what they deserve or requires further adjustment.

5.

A. Whenever a buisness runs a credit card,it has to pay a transaction fee and pay a percentage of sale amount to the processing company.It increases cost of company.

B. For small buisness,accepting credit card payment introduces potential for charge back.

C. Credit card increases the growing risk of fraud and sometimes this cost of fraud will have to be borne by the company.

6.

A. Firm and maintain its sale and fulfill the demands by holding adequate inventory.

B.Firm can reduce its ordering cost,transportation cost and other cost by holding adequate inventory.

C.Holding adequate inventory reduces the hindrances in production due to shortage of inventory.