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CA Intermediate · Financial Management and Strategic Management · Management of Receivables

In the context of credit policy for managing receivables, which one of the following is correctly described as a 'Capacity' consideration among the five Cs of credit?

Capacity in the five Cs of credit means the customer's ability to repay the credit from its cash flows and operating performance. Security pledged is Collateral, reputation and willingness to pay is Character, and the general economic environment is Conditions.

  1. AThe customer's assessment of ability to repay from its cash flows and operating performanceCorrect
  2. BAssets or security pledged by the customer against the credit granted
  3. CThe customer's reputation and willingness to honour obligations
  4. DPrevailing general economic conditions affecting the customer's business

Explanation

Capacity refers to the customer's ability to pay out of operating cash flows and performance. Collateral is the pledged security, Character is willingness to pay, and Conditions are general economic factors. So the option on security describes Collateral, not Capacity.

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