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

Which of the following is the 'Capacity' element among the five Cs of credit evaluation of a customer?

Capacity is the customer's ability to repay credit from its operating cash flows, judged from financial statements and payment history. Security offered is Collateral, willingness to pay is Character, and the economic environment is Conditions.

  1. AThe customer's ability to repay from its operating cash flows and past payment recordCorrect
  2. BThe assets pledged by the customer as security against the credit granted
  3. CThe general economic conditions affecting the customer's industry
  4. DThe customer's sincerity and willingness to honour obligations

Explanation

Capacity refers to the customer's ability to pay dues out of its operating cash flows, judged from past payment behaviour and financial statements. Pledged assets represent Collateral, economic conditions represent Conditions, and willingness to pay represents Character.

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