CA Intermediate · Financial Management and Strategic Management · Management of Receivables
In receivables management, the 'five Cs of credit' are used mainly for which purpose?
The five Cs of credit, namely Character, Capacity, Capital, Collateral and Conditions, are used to evaluate the creditworthiness of a prospective customer before credit is granted. They are qualitative assessment factors and do not compute discounts, cheque float or debtors' average age.
- AEvaluating the creditworthiness of a prospective customerCorrect
- BCalculating the cash discount to be offered
- CDetermining the collection float of cheques
- DComputing the average age of outstanding debtors
Explanation
The five Cs (Character, Capacity, Capital, Collateral, Conditions) are a qualitative framework for judging whether a customer should be granted credit. They do not compute discounts, float or ageing, which are quantitative tools.
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