KASNEB CCP flashcards
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32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Credit standards
- Criteria a firm uses to decide which customers qualify for credit, balancing increased sales from looser standards against higher bad debt and carrying costs.
- Average collection period
- Days needed to collect receivables on average, computed as accounts receivable divided by credit sales, multiplied by 365; a lower figure indicates faster collection.
- Aging schedule
- Classification of accounts receivable by time outstanding, showing the proportion overdue beyond credit terms and highlighting collection weaknesses.
- Credit terms 2/10 net 30
- A 2% discount is allowed if payment is made within 10 days; otherwise the full invoice amount falls due within 30 days.
- Cost of forgoing discount
- Annualised cost of not taking a cash discount, calculated as discount over net amount times 365 divided by the extra days of credit.
- Factoring receivables
- Sale of accounts receivable to a third party at a discount, transferring collection and often credit risk to the factor in exchange for immediate cash.
- Collection policy
- Procedures and escalation steps a creditor follows to obtain payment of overdue accounts, ranging from reminders through to legal enforcement.
- Marginal credit decision
- Extend credit only where the incremental contribution from extra sales exceeds the incremental cost of financing, bad debts, and administration.
- Current ratio
- Current assets divided by current liabilities; measures short-term liquidity and the buffer available to meet obligations falling due within a year.
- Quick ratio
- Cash, marketable securities, and receivables divided by current liabilities; excludes inventory to test liquidity without relying on stock sales.
- Interest cover
- Earnings before interest and tax divided by interest expense; indicates how many times operating profit can absorb finance charges.
- Debt service cover ratio
- Cash available for debt service divided by total debt service for the period; lenders typically require a ratio comfortably above one.
- Gearing ratio
- Total debt divided by equity or total capital; higher gearing signals greater reliance on borrowed funds and higher financial risk.
- CAMPARI framework
- Lending appraisal mnemonic: Character, Ability, Margin, Purpose, Amount, Repayment, Insurance; guides structured assessment of a credit proposal.
- Receivables turnover
- Credit sales divided by average receivables; shows how many times receivables are converted to cash in a period.
- Free cash flow
- Operating cash flow less capital expenditure; represents funds available to service debt, pay dividends, or retain within the business.
- Loan covenants
- Contractual conditions in a facility requiring the borrower to maintain specified financial ratios or restrict certain actions, protecting lender interests.
- Balloon repayment
- Loan structure where periodic payments cover interest only or partial principal, with a large lump sum due at maturity.
- Contract of guarantee
- A promise by a surety to answer for another person's debt or default, creating a secondary liability contingent on the principal debtor failing.
- Contract of indemnity
- A promise to reimburse another against loss; the indemnifier's liability is primary and independent of any third party's default.
- Pledge versus mortgage
- A pledge transfers possession of movable property as security, while a mortgage charges property as security without transferring possession.
- Lien
- A right to retain possession of another's property until a debt or obligation relating to that property is satisfied.
- Statute of limitations
- Law limiting the period within which a creditor may sue to recover a debt, commonly six years for simple contracts unless the debt is acknowledged.
- Set-off
- Right of a creditor to net mutual debts owed between the parties, reducing the amount recoverable to the net balance.
- Customer due diligence
- Anti-money-laundering process of identifying customers, verifying identity, and understanding the purpose of the business relationship before lending.
- Assignment of receivables
- Transfer of the right to collect a debt to another party; enforceability generally requires notice to the debtor under applicable law.
- Expected credit loss
- Estimated loss computed as probability of default multiplied by loss given default multiplied by exposure at default for a facility.
- Loss given default
- Proportion of exposure not recovered after a borrower defaults, reflecting collateral recovery, costs, and time taken to realise security.
- Non-performing loan ratio
- Non-performing loans divided by total gross loans; a key indicator of asset quality and deterioration in a lending portfolio.
- Specific provision
- Amount set aside against individually identified impaired loans where objective evidence of loss exists and recovery is doubtful.
- Credit risk mitigation
- Techniques reducing exposure or loss severity, including collateral, guarantees, netting arrangements, covenants, and credit derivatives.
- Forbearance
- Concession granted to a borrower in financial difficulty, such as rescheduling or rate reduction, often a precursor to formal restructuring.