OSBORNE BOOKS TUTOR ZONE

Credit Management and Control

Practice assessment

Osborne Books Limited, 2011

credit management and control tutor zone

Credit Management and Control Practice Assessment (Part One)

Task 1.1

(a)

(b)

Select from the following, the three elements that are essential to all contracts.

An agreement, made up of offer and acceptance

A contract in writing, signed by both parties

An invitation to treat

An intention to create legal relations

A passing of consideration (value)

Select from the following, the one situation that would not form a contract because there is
no intention to create legal relations.

(c)

John sells his bicycle to his friend for 50

John buys a new computer from an online retailer

John offers to pay for his friend to go to the cinema with him

John rents a room in his house to his friend for 200 per month

Vikram buys some food from a local supermarket and pays using his credit card. Select from
the following events, the one point at which the contract between Vikram and the shop is
complete.

When Vikram settles his credit card bill in full

When the shop assistant enters the items through the till and Vikram
pays by credit card

When the shop receives the money from Vikrams credit card into its
bank account

When Vikram takes the items from the supermarket shelf and puts
them in his trolley

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Task 1.2

(a)

Adele is in a supermarket when she sees a sign saying all goods on this shelf are 50% off
marked price. She selects an item marked at 15 from the shelf and takes it to the checkout.
The checkout operator tells her that the item was put on that shelf in error and that the price
is 15. Can Adele demand that the item is sold to her for 7.50? Select one option.

(b)

Yes, because a contract was formed when the item was taken from
the shelf by Adele

No, because 7.50 is not adequate consideration for an item usually

sold for 15

Yes, because the notice on the shelf forms a legal condition of the
sale

No, because the notice was only an invitation to treat, not an offer

Nada owns a hairdressing salon. She places an advertisement in the local paper stating that
a cut and blow-dry is available for 30 instead of the usual 50 during the next week. What
is this advertisement an example of? Select one option.

(c)

A contractual offer

An invitation to treat

The acceptance of an offer

An agreement with legal consequences

Exe Limited receives an order from Aye Limited for 1000 litres of heating oil costing 650.
Exe Limited emails an order acknowledgement to Aye Limited. What is the order
acknowledgement an example of? Select one option.

A counter-offer

An invitation to treat

An offer

An acceptance

credit management and control tutor zone

(d)

Wye Limited receives an order from Bee Limited for 1000 kilos of material at 20 per kilo.
Wye Limited responds with an email that states that the price is now 22 per kilo, but that
they can supply at the 22 per kilo price. What is the email from Wye Limited an example
of? Select one option.

A counter-offer

An invitation to treat

Consideration

An acceptance

Task 1.3

(a)

Jane bought a new pair of red shoes from a shop. The second time that she wore them it
rained and the dye ran, leaving the shoes with streaks of colour. If Jane complains to the
shop, what legislation should she refer to? Select one.

(b)

Trade Descriptions Act

Sale of Goods Act 1979

Consumer Credit Act 1974

Unfair Contract Terms Act

Mike contracted to hire a large car to take his family on holiday in the UK. When he arrived
at the car hire company to collect the car he was told that the only car available was a twoseater sports car. The person at the hire company showed Mike a copy of the hire contract,
which stated (among many other clauses) that the hire company reserved the right to
substitute any other car for the one specified in the contract. Which one of the following Acts
may assist Mike in this situation?

Trade Descriptions Act

Data Protection Act

Consumer Credit Act 1974

Unfair Contract Terms Act

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(c)

Dave takes his car to a local garage for a service. The garage quotes Dave 120 for the
service, and gives him a list of the jobs that the service covers. The list includes check
chassis for excessive rust. Later in the day the garage rings Dave to tell him that they have
finished the service, but have discovered a lot of rust in the chassis. They tell Dave that they
can weld the chassis for an extra 100. Which one of the following is Dave not entitled to
do?

Dave can agree to the garage carrying out the welding and pay
them a total of 220

Dave can pay the garage for the service but ask the garage not to
carry out the welding

Dave can demand that the service and welding should be

completed for the original price quoted of 120

Dave can ask the garage if they will reduce the price of the welding
to 80, and if they agree, go ahead on that basis

Task 1.4

(a)

The Data Protection Act 1998 requires that personal data is handled properly. Which one of
the following is not a requirement of the Act.

(b)

Personal data must be fairly and lawfully processed

Personal data must be able to be processed for any purpose

Personal data must be accurate

Personal data must not be kept longer than necessary

The Data Protection Act applies to data relating to specific people or organisations. Which
one of the following does the Act not apply to?

Data relating to a sole trader

Data relating to a limited company

Data relating to a private individual

Data relating to a partnership

credit management and control tutor zone

Task 1.5

(a)

Zed Limited is owed 12,000 by Cee Limited for goods supplied, but Cee Limited has
refused to pay. Which of the following courts will deal with any action taken by Zed Limited
to enforce the repayment of the debt? (Select one.)

(b)

The Small Claims Court

The Fast Track of the County Court

The Magistrates Court

The High Court

Kay Limited has been granted a judgement for 1,000 owed by an individual customer for
services rendered. The customer is in employment, but has negligible assets. Which of the
following would be the most appropriate type of enforcement for Kay Limited to apply for?
(Select one.)

(c)

A garnishee order

A warrant of execution

A warrant of delivery

An attachment of earnings

Which of the following is an example of a situation where there is a valid contract and any
non-payment can be pursued through the courts? (Select one.)

(d)

Goods have been supplied, but were never ordered

Goods have been supplied based on a telephone order

Goods have been supplied based on an order that was cancelled

before the goods were despatched

Services have been provided, but were never ordered

Which of the following is a clause that asserts that ownership of goods does not pass to the
buyer until payment has been made? (Select one.)

Credit insurance

An action for the goods

A charging order

Retention of title

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(e)

What is the minimum amount that must be owed by an individual before the creditor can
apply to have the individual declared bankrupt?

100

750

10,000

25,000

Task 1.6

(a)

(b)

Of the following categories of assets, which is the most liquid? (Select one.)

Inventories (stocks)

Non-current (fixed) assets

Bank balances

Receivables (debtors)

Jay Limited is owed an amount by Que Limited for goods supplied. Which of the following
documents would not be useful when attempting to collect the outstanding amount? (Select
one.)

(c)

Copy of payables (aged creditors) analysis

Copy of signed delivery note(s) for goods supplied

Copy of outstanding sales invoice(s)

Copy of purchase order(s)

Which of the following documents could not be used to help evaluate the credit status of a
prospective customer? (Select one.)

Financial accounts of prospective customer

Bank references for prospective customer

Receivables (aged debtors) analysis

Trade references for prospective customer

credit management and control tutor zone

(d)

Which of the following will only provide information related to limited companies (not
individual traders)? (Select one.)

(e)

Companies House

Credit reference agencies

Bank references

Credit circles

Of the following phrases that could be used as part of a bank reference, which one is the
most favourable (i.e. the lowest risk)?

Although their capital is fully employed we do not consider that the

directors would enter into a commitment they could not see their
way to fulfil

Should prove good for your figure and purpose

Undoubted

Good for your figure and purpose

Task 1.7

(a)

What does the term net monthly mean when applied to credit terms? (Select one.)

If the invoice is paid in one month then the VAT does not have to be
paid

Payment is due one month from the invoice date

Payment is due at the end of the month following the month of

delivery

Payment is due by the end of the month of delivery

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(b)

The cost of providing a settlement discount can be calculated as an annual interest rate.
Which one of the following formulas shows the correct calculation method? Assume that d
= settlement discount percentage, N = normal settlement period in days, and D = settlement
period for early payment in days.

[d / (100 d)] x [365 / (N - D)] x 100

[d / (100 d)] x [(N D) / 365] x 100

[(100 d) / d] x [365 / (N - D)] x 100

[d / (100 d)] x [365 / (D - N)] x 100

Task 1.8
(a)

(b)

(c)

Which of the following statements relates to recourse factoring? (Select one.)

A

The factoring company lends against unpaid invoices, takes over

sales ledger administration and provides insurance against bad debts

The factoring company lends against the paid invoices, takes over
sales ledger administration and provides insurance against bad debts

The factoring company lends against unpaid invoices, takes over

sales ledger administration but does not provide insurance against
bad debts

The factoring company lends against selected unpaid invoices, but

does not take over the sales ledger administration nor provide
insurance against bad debts

Which of the following will credit insurance allow an organisation to claim for? (Select one.)

Losses due to a fire in the credit controllers office

Amounts that an organisation cannot afford to pay its creditors

Amounts claimed against the organisation for selling faulty products

Amounts owed by customers who have defaulted on payment

Which of the following is an example of a third party who will act on behalf of a client to
collect debts when the clients own efforts have proved unsuccessful? (Select one.)

A factor

A credit insurer

An invoice discounter

A debt collection agency

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Credit Management and Control Practice Assessment (Part Two)

Online project
(a)

You work as a credit control manager for Beta Limited which uses a credit rating system to
assess the credit status of new and existing customers.
The credit rating (scoring) system table below is used to assess the risk of default by
calculating key indicators (ratios), comparing them to the table and calculating an aggregate
score.
Credit rating (scoring) system

Score

Operating profit margin

Losses

Less than 5%

5% and above but less than 10%

10% and above but less than 20%

10

More than 20%

20

Interest cover
No cover

30

Less than 1

20

More than 1 but less than 2

10

More than 2 but less than 4

More than 4

10

Current ratio
Less than 1

20

Between 1 and 1.25

10

Between 1.25 and 1.5

Above 1.5

0
10

Gearing (long-term debt/(long-term debt plus equity))

Less than 25%

20

25% and above but less than 50%

10

More than 50% less than 65%

Between 65% and 75%

20

Between 75% and 80%

40

Above 80%

100

Risk

Aggregate score

Very low risk

Between 60 and 21

Low risk

Between 20 and 1

Medium risk

Between 0 and 24

High risk

Between 25 and 50

Very high risk

Above 50

New customer request form D Limited

The sales department has asked for a credit limit of 60,000 to be given to D Limited who
is a potential new customer. The financial information below has been supplied by D Limited.

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New customer request form E Limited

The sales department has asked for a credit limit of 25,000 to be given to E Limited who
is a potential new customer. The financial information below has been supplied by E Limited.

INCOME STATEMENT

20x2
'000

'000

Turnover

7,000

6,000

Cost of sales

3,850

3,500

Gross profit

3,150

2,500

870

750

Distribution costs
Administration costs
Operating profit
Interest payable
Profit on ordinary activities before taxation
Tax on profit on ordinary activities
Profit for the financial year
STATEMENT OF FINANCIAL POSITION

20x1

600

500

1,680

1,250

250

250

1,430

1,000

350

280

1,080

720

20x2

20x1

'000

'000

6,800

6,100

Non-current assets
Tangible assets
Current assets
Inventories

1,390

1,400

Trade receivables

680

500

Cash

400

350

2,470

2,250

Trade payables

1,090

1,250

Net current assets

1,380

1,000

Long-term loans

2,500

2,500

Net assets

5,680

4,600

Current liabilities

Non-current liabilities

Capital and reserves

Share capital

2,000

2,000

Profit and loss account

3,680

2,600

Shareholders funds

5,680

4,600

practice assessment

1.1

13

Using the templates provided:

(i)

Calculate the key indicators for 20x2 and 20x1 for D Limited and E Limited, and

(ii)

Rate each company using the credit rating (scoring) system.

1.2

Based on the results of your credit rating, recommend, with reasons, whether the requested
credit limits should be given to D Limited and E Limited.

1.3

Where credit is being refused, draft a note or a letter communicating the decision and
explaining what action the company could take to improve its chances of being granted
credit in the future.

OR
Prepare a telephone script which could be used by the person contacting the company to
communicate the decision regarding the requested credit limit.

Answer template for Part (a) calculations:

D Limited

Indicator

Year

20x2

Rating

Indicator

Rating

20x1

Operating profit margin

Interest cover
Current ratio
Gearing

E Limited

Indicator

Year

20x2

Operating profit margin

Interest cover
Current ratio
Gearing

Rating

Indicator
20x1

Rating

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credit management and control tutor zone

Existing customer requesting increased credit limit G Limited

G Limited has been trading with Beta Limited for several years and has, until recently,
always paid to terms. Following several late payments they have now contacted Beta
Limited to request an increase in their credit limit from 40,000 to 80,000. G Limited has
supplied the accounts below.

INCOME STATEMENT

20x2

20x1

'000

'000

Turnover

5,000

4,000

Cost of sales

2,580

1,950

Gross profit

2,420

2,050

Distribution costs

850

680

Administration costs

880

630

Operating profit

690

740

Interest payable

550

250

Profit on ordinary activities before taxation

140

490

20

140

120

350

20x2

20x1

'000

'000

5,300

2,890

Inventories

590

450

Trade Receivables

850

680

90

400

1,530

1,530

1,290

1,000

240

530

Tax on profit on ordinary activities

Profit for the financial year
STATEMENT OF FINANCIAL POSITION
Non-current assets
Tangible assets
Current assets

Cash
Current liabilities
Trade payables
Net current assets
Non-current liabilities
Long-term loans

4,000

2,000

Net assets

1,540

1,420

500

500

Capital and reserves

Share capital
Profit and loss account

1,040

920

Shareholders funds

1,540

1,420

practice assessment

15

Additional information supplied by the sales department after a visit to G Limited:

G Limited has recently purchased new non-current assets with long term loans, and has
increased its capacity so that it can in future further increase its sales. Although some
operating costs have risen more than the directors had hoped, partly due to additional
training costs, the company has remained profitable at the after tax level.
The current assets have risen, partly due to the increased turnover, although inventories
have been deliberately increased to cope with anticipated future demand.

Required
1.4

1.5

Using the templates provided:

(i)

Calculate the key indicators for 20x1 and 20x2 for G Limited, and

(ii)

Rate the company using the credit rating (scoring) system.

Based on the results of your credit rating, and taking into account the trading history and
additional information supplied by the sales department, recommend a course of action.
You could make use of additional terms in the contract or any other options open to Beta
limited which could provide additional comfort.

Answer template for Part (a) calculations:

G Limited

Indicator

Year

20x2

Operating profit margin

Interest cover
Current ratio
Gearing

Rating

Indicator
20x1

Rating

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credit management and control tutor zone

(b)

You have been provided with the credit control policy for Beta Limited, and a receivables
(aged debtors) analysis at 31 March 20x2.

Credit control policy for Beta Limited.

Current credit control procedures once credit limit has been agreed:
1.

An order for goods is received by email, fax or phone (all phone calls are recorded).

2.

Goods are delivered and a goods received note is signed by the customer.

3.

The goods received notes are kept in a file in the accounts office.

4.

An invoice will be issued a few days after delivery on 30 day terms.

5.

An aged analysis of trade receivables (debtors) is produced monthly.

6.

A reminder telephone call is made when the debt is 7 days overdue.

7.

When a debt is 14 days overdue a letter is sent.

8.

When the debt is 28 days overdue the account will be put on stop.

9.

The debt will either be placed in the hands of a debt collection company or legal
proceedings could be instigated if the customer does not respond to calls or letters.

10.

The business is credit insured, however insurance is only given for customers once
they have a history of trade with the business of at least 12 months and have
successfully paid for at least 3 invoiced amounts.

Aged debtor analysis as at 31 March 20x2

Balance

0 30 days

31 60 days

61 90 days

Over 90 days

Aye Limited

15,000

15,000

BeeCo Limited

20,000

5,000

15,000

Cee Limited

55,000

27,500

27,500

Dee Limited

12,000

5,000

5,000

HiLo Limited

40,000

40,000

Eye Limited

20,500

20,000

Jay & Partners

13,000

(42,000)

Kay Limited

25,000

Elle Limited

23,000

23,000

Emme Limited

18,000

8,000

110,000

40,000

30,000

Are Limited

40,000

20,000

20,000

Aspirations

11,000

Esse Limited

65,000

Customer

Owe plc

2,000

500
3,000

52,000
25,000

10,000

5,000

40,000

6,000
65,000

practice assessment

17

The assistant responsible for credit control is on sick leave but you have access to notes he
prepared.
Notes provided by the assistant credit controller
Aye Limited is a new customer and placed its first order a few weeks ago.
BeeCo Limited has queried the 15,000 invoice and claim that they cannot trace delivery.
They have promised payment of the more recent invoice in the next few days.
Cee Limited is a fairly new customer that regularly orders the same amount each month.
They paid for the first invoice on time, but have yet to pay for any further invoices. There is
a current order for a further 27,500 being processed.
Dee Limited has a history of paying late but they have always paid eventually.
HiLo Limited is a long standing customer and has always settled their account within trading
terms.
Eye Limited short paid an invoice some months ago; the reason is not known. All
subsequent invoices have been paid on time.
Jay and Partners have an unallocated payment on their account.
Kay Limited has gone into administration. The account is not credit insured.
Elle Limited is an established customer.
Emme Limited is a small rapidly expanding business, whose payments have been getting
slower recently.
Owe plc is a large multinational company with an excellent credit rating. The company has
consistently paid late.
Are Limited has usually paid regularly, if sometimes a little late.
Aspirations is the trading name of Jim Small. The letters addressed to Aspirations have
recently been returned as gone away.
Esse Limited is a long established customer that has recently gone into liquidation.

Required:
Review the receivables (aged debtors) analysis and the assistants notes and prepare an
action plan. The action plan should include a summary of options available for the company
to pursue and recommendations for provisions or write off of bad debts where appropriate.