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

In the traditional framework for credit evaluation of a customer, which of the 'Five Cs' refers to the judgement of the customer's ability to repay the dues, based on the cash flows and past payment record?

Capacity is the correct C. It measures the customer's ability to pay, judged from cash flows and past payment record. Character concerns willingness to pay, Capital concerns financial strength, and Conditions concerns the wider economic environment, so none of those describes ability to repay from cash flows.

  1. ACharacter
  2. BCapacityCorrect
  3. CCapital
  4. DConditions

Explanation

Capacity is the assessment of whether the customer can actually meet its obligations from cash flows and past payment behaviour. Character is about willingness to pay, Capital is about financial resources, and Conditions is about the general economic environment affecting the customer.

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