Examples of credit in the following topics:
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- To establish a credit policy, a company must establish credit standards, credit terms, and a collection policy.
- There are three steps a company must undergo when developing a credit policy:
- Management must decide on credit standards, which involves decisions on how much credit risk to assume.
- Another important factor in determining credit standards involves a company evaluating the credit worthiness, or credit score, of an individual or business.
- To reduce its risk, the seller may perform a credit check on the buyer or require the buyer to put up collateral against credit extended.
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- Bond credit rating agencies assess and report the credit worthiness of a corporation's or government's debt issues.
- In investment, the bond credit rating assesses the credit worthiness of a corporation's or government's debt issue.
- The credit rating is analogous to a credit rating for individuals.
- These are bonds that are rated below investment grade by the credit rating agencies.
- Credit ratings are used to report on the credit worthiness of a bond issuing company or government
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- The credit rating is a financial indicator assigned by credit rating agencies; bond ratings below BBB-/Baa are considered junk bonds.
- In investment, the bond credit rating assesses the credit worthiness of a corporation's or government's debt issues.
- It is analogous to credit ratings for individuals.The credit rating is a financial indicator to potential investors of debt securities, such as bonds.
- Moody's assigns bond credit ratings of Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C, with WR and NR as withdrawn and not rated.
- Standard & Poor's and Fitch assign bond credit ratings of AAA, AA, A, BBB, BB, B, CCC, CC, C, and D.
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- Many borrowers seek bank loans for mortgages, car loans, or credit cards.
- Credit unions are another depository institution.
- Credit union extends membership to people who share a common interest.
- For example, many states have credit unions for schoolteachers.
- Consequently, the commercial banks want credit unions on equal grounds with commercial banks because a credit union does not pay income taxes on its profit.
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- Recording of a debit amount to one account and an equal credit amount to another account results in total debits being equal to total credits for all accounts in the general ledger.
- Assets Accounts: debit increases in assets and credit decreases in assets.
- Capital Accounts: credit increases in capital and debit decreases in capital.
- Liabilities Accounts: credit increases in liabilities and debit decreases in liabilities.
- In short, a credit to asset accounts will cause an increase in the balance sheet accounts.
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- International credit-rating agencies do not focus on risk for particular companies but assess investment risk associated with countries.
- Two well-known credit agencies are A.M Best and Coface.
- Best is an international credit agency that classifies country risk into five tiers.
- Coface, France's export credit underwriter, is another international credit-rating agency.
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- Collecting upon accounts receivable is the final step in the credit extension process, and arguably the most difficult.
- By comparing this number to the number in the credit policy, a business can determine whether its policy is effective or not.
- The accounts receivable days is important because investors utilize this measure to evaluate a firm's credit management policy.
- Another way to evaluate a credit policy is to look at the receivable turnover ratio.
- A company may protect against bad-debts losses by purchasing trade credit insurance.
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- Using the cost method, a treasury stock account is increased (debited) in the equity section of the balance sheet for the stock purchase price and cash is reduced (credited).
- When the treasury stock is sold back on the open market, the treasury stock account is reduced (credited) for the original cost and the difference between original cost and sales price is debited or credited to a treasury stock paid in capital account, which is also disclosed in the equity section of the balance sheet.
- Cash is also credited for the purchase price.
- When the stock is resold, treasury stock is credited for the par value of the stock sold.
- Differences between the sales price and repurchase price are debited or credited to paid in capital, along with a debit to cash for proceeds from the sale.
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- Default risk (or credit risk) of a bond refers to the risk that a bond issuer will default on any type of debt by failing to make payments which it is obligated to do.
- To reduce the bondholders' credit risk, the lender may perform a credit check on the prospective borrower, may require the issuer to take out appropriate insurance, such as mortgage insurance or seek security or guarantees of third parties, besides other possible strategies.
- Credit default swaps are an instrument to protect against default risk.
- This image shows the monthly prices of sovereign credit default swaps from January 2010 till September 2011 of Greece, Portugal, Ireland, Hungary, Italy, Spain, Belgium, France, Germany, and the UK (Greece is illustrated by blue line).
- Higher credit default swap prices mean that investors perceive a higher risk of default.