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

Which of the following is a feature of the 'Capacity' element among the five Cs of credit used to evaluate a customer's creditworthiness?

Capacity in the five Cs of credit means the customer's ability to meet its credit obligations from its operating cash flows. Pledged assets are Collateral, willingness to pay is Character, and the economic environment is Conditions, so only the cash-flow ability option describes Capacity.

  1. AThe customer's ability to meet credit obligations from its operating cash flowsCorrect
  2. BThe assets pledged by the customer to secure the credit
  3. CThe customer's willingness to pay based on moral character
  4. DThe economic conditions affecting the customer's industry

Explanation

Capacity refers to the customer's ability to pay dues out of its operating cash flows and working capital. Collateral relates to pledged assets, Character relates to willingness to pay, and Conditions relate to the economic environment. The option describing pledged assets is therefore wrong, as it describes Collateral.

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