Class 11 Retail Chapter 2 Process of Credit Application

Class 11 Retail Chapter 2 Process of Credit Application Solutions English Medium As Per AHSEC New Syllabus to each chapter is provided in the list so that you can easily browse through different chapters Class 11 Retail Chapter 2 Process of Credit Application Question Answer and select need one. Class 11 Retail Chapter 2 Process of Credit Application Notes Download PDF. AHSEC Class 11 Elective Retail Question Answer English Medium.

Class 11 Retail Chapter 2 Process of Credit Application

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Also, you can read the NCERT book online in these sections Solutions by Expert Teachers as per Central Board of Secondary Education (CBSE) Book guidelines. AHSEC Class 11 Elective Retail Textual Solutions are part of All Subject Solutions. Here we have given AHSEC Class 11 Retail Textbook Solutions English Medium for All Chapters, You can practice these here.

Process of Credit Application

Chapter: 2

A. Fill in the blanks:

1. When goods are sold without receiving immediate ___________, it is called a credit sale.

Ans: Payment.

2. Credit sales are made between a ___________ and a __________ with a buyer agreeing to pay in instalments.

Ans: Seller, customer.

B. Multiple choice questions:

1. A requirement or event that should be performed before the ______________, is known as ‘Condition’.

(a) Completion of another action.

(b) Agreement.

(c) Treatment.

(d) None of the above.

Ans: (b) Agreement.

2. Which of these is an essential element of a contract of sale?

(a) Transfer of property.

(b) Money consideration.

(c) Goods.

(d) All of the above.

Ans: (d) All of the above.

C. State whether the following are True or False:

1. There must be at least three parties for contract of sale.

Ans: False.

2. In a contract of sale, the consideration is price.

Ans: True.

3. Agreement to sell means a contract of sale.

Ans: True.

D. Match the columns:

Ans:

E. Short answer questions:

1. Define credit sales.

Ans: Credit sales refer to sales that involve extending credit to the customer. The customer takes the product now and agrees to pay for it later. Credit sales are a type of trade credit. They create receivables, or money owed to the company from customers.

2. What are the benefits of credit sales?

Ans: The benefits of credit sales are as follows:

(i) Meet the competition: When competitors are making sales on credit to customers, any business will need to do the same just to stay competitive.

(ii) Increase in sales: An increase in sales may or may not happen when one starts selling on credit. If your competitors are not offering credit terms, then you will gain sales by offering credit terms, because your customers will buy from you instead of having to pay cash from your competitors.

(iii) Better customer loyalty: Offering credit to customers indicates that you respect and trust them to pay before their due dates. Customers will reward these gestures of confidence by continuing to buy from you.

3. What is a credit sale agreement?

Ans: A credit sale agreement is an agreement for the sale of goods under which the purchase price, or part of it, is payable by instalments.

4. What is a retail credit facility?

Ans: Retail credit facility is a financing method, which provides loan facility to retail consumers for purchasing goods and services. Retail credit facilities lend funds

to customers wanting to purchase high-valued items but are short on capital. Thus, retail credit facilities may enable a greater number of consumers access to a retailer’s goods. The risk of default is the main factor behind high rates of interest charged by retail credit facilities.

5. Explain agreement to sell.

Ans: Agreement to sell constitutes the terms and conditions of sale by the seller to the buyer. These terms and conditions include the amount at which it is to be sold and the future date of full payment.

F. Long answer questions:

1. Explain the features of credit sales.

Ans: Credit sale is selling goods to a customer by transferring from seller to the customer without paying the money immediately. Payment of goods can be done as per the agreement. 

The features of credit sale are as given below:

(i) The transferor, normally, deals in goods and services.

(ii) The title of the goods lies with the seller before it is sold on credit.

(iii) There are fewer formalities, especially in the case of open accounts.

(iv) It is, usually, extended for three months.

(v) It depends on terms imposed by the seller.

(vi) No security is required.

(vii) It can be facilitated with different financial institutions with easy terms and conditions at a continuous rate.

(viii) Almost half of the short financial requirement of retail is met by this type of mutual trust and cordial relations. 

2. What conditions are used for the sale of goods on credit?

Ans: A contract of sale is a legal contract for the exchange of goods, services or property from seller to buyer for an agreed upon value in money paid or the promise to pay the same. It is a specific type of legal contract. 

There are some provisions in a contract of sale, which have been discussed below:

(i) The contract of sale is an agreement, in which a seller agrees to transfer goods to a buyer at a price. It is made when there is both an offer as well as an agreement to buy or sell goods for a price.

(ii)  It can be made in writing or by word of mouth.

(iii)  A contract of sale is a generic term, which includes:

(a) Sale and (b) Agreement to sell.

3. Write the differences between condition and warranty.

Ans: The differences between condition and warranty are as follows:

5. What are the essential elements of a contract of sale?

Ans: There are various essential elements which must be present in a contract of sale. These are as given below:

(a) Essential elements of a contract: All other essentials of a valid contract as per the Indian Contract Act, 1872, must be present. The parties of a contract must be competent, their consent must be free, and the objective of the contract must be lawful and so on.

(b) Bilateral contract: To make a contract of sale there must be at least two parties. These parties must be distinct, i.e., a seller and buyer.

(c) Transfer of property: In a contract of sale, the objective is to transfer the general property from the seller to the buyer in case of goods.

(d) Goods: The subject matter of the contract of sale of goods must be some goods. The purpose of this contract is to transfer the property in these goods from the seller to the buyer.

(e) Price  the consideration: In a contract of sale the consideration is ‘price’. Price or consideration may be partly in money and partly in goods.

G. Check your performance:

1. Demonstrate the essentials of a contract of sale.

Ans: There are various essential elements which must be present in a contract of sale. 

These are as given below:

(a) Essential elements of a contract: All other essentials of a valid contract as per the Indian Contract Act, 1872, must be present. The parties of a contract must be competent, their consent must be free, and the objective of the contract must be lawful and so on.

(b) Bilateral contract: To make a contract of sale there must be at least two parties. These parties must be distinct, i.e., a seller and buyer.

(c) Transfer of property: In a contract of sale, the objective is to transfer the general property from the seller to the buyer in case of goods.

(d) Goods: The subject matter of the contract of sale of goods must be some goods. The purpose of this contract is to transfer the property in these goods from the seller to the buyer.

(e) Price  the consideration: In a contract of sale the consideration is ‘price’. Price or consideration may be partly in money and partly in goods.

2. Demonstrate the features of credit sales.

Ans: Credit sale is selling goods to a customer by transferring from seller to the customer without paying the money immediately. Payment of goods can be done as per the agreement. 

The features of credit sale are as given below:

(i) The transferor, normally, deals in goods and services.

(ii) The title of the goods lies with the seller before it is sold on credit.

(iii) There are fewer formalities, especially in the case of open accounts.

(iv) It is, usually, extended for three months.

(v) It depends on terms imposed by the seller.

(vi) No security is required.

(vii) It can be facilitated with different financial institutions with easy terms and conditions at a continuous rate.

(viii) Almost half of the short financial requirement of retail is met by this type of mutual trust and cordial relations. 

A. Fill in the blanks:

1. Credit check strategy is adopted by retailers to check the customer’s _______________.

Ans: Bad debts.

2. Retail firms must have ______________ from customer.

Ans: Authorisation.

B. Multiple choice questions:

1. The main objective of a credit check is to manage the risk of ______________.

(a) Bad debts.

(b) Credit sales.

(c) Cash sales.

(d) None of the above.

Ans: (a) Bad debts.

2. Before retail firms extend credit to a customer, it is the best practice to check the prospective customer’s ________________.

(a) Profile of the customer.

(b) History.

(c) Background.

(d) None of the above.

Ans: (b) History.

3. ______________ is the risk involved in offering credit.

(a) Financial risk.

(b) Reduced cash flow.

(c) Increased cash flow.

(d) None of the above.

Ans: (a) Financial risk.

C. State whether the following are True or False:

1. Credit check is a type of search.

Ans: True.

2. Credit checking is not needed to protect the interests of the parties concerned.

Ans: False.

3. A credit record is basically an account of any type of credit.

Ans: True.

4. Approval from the customer is not required while credit check of his/her account.

Ans: False. 

D. Short answer questions:

1. What is the meaning of credit check?

Ans: Credit check is a sort of search performed by the retailer to evaluate a customer’s creditworthiness. After a credit check the retailer is able to assess whether the customer can handle his or her money matters and fulfill the requirements for credit.

2. What is positive credit reporting?

Ans: In the past, credit check included ‘negative’ behaviour, which took place when a customer failed to meet obligations in financial dealings. The credit score is now

calculated on the basis of this information, together with other credit activity in the customer’s file, such as previous enquiries from credit providers. This provides a clear picture of the customer’s finances, and shows if the customer has recovered from any credit difficulty in the past.

E. Long answer questions:

1. What is the legal and company procedures for carrying out credit checks?

Ans: A person’s credit history is private. Therefore, a retail firm needs to seek permission from the customer before accessing any information legally. The retailer should ensure that the customer has filled a credit application form and signed it. A customer should be made aware of the terms and conditions of the credit offered. There are company procedures to carry out a credit check of a customer and the information collected must not be used for any purpose other than the intended purpose. The retailer must maintain customer confidentiality while carrying out a credit check.

2. Explain the need for credit checking.

Ans: There is a need for credit check as it helps the retailer to assess if a customer is creditworthy. 

Given below are some of the reasons for conducting a credit check:

(i) Credit check protects the interests of parties. It also ensures that each party has the capacity to enter into a transaction.

(ii) Retail firms should run a credit check on customers any time whenever the customers apply for a loan, hire purchase, credit card, store card or line of credit.

(iii) A credit check provides information about the customer’s mortgage, credit cards, arranged overdrafts, personal loans, car finance, hire purchases, and repayment history of phone accounts, etc.

(iv) A credit record is basically an account of any type of credit of the customer given for the last six years. It reveals how much money is being accessed by the customer and if the customer has failed to make any obligations, etc.

(v) When applying for credit, the customer is asked by the lender for his or her consent to check the customer’s credit file. This allows them to customer, current commitments and reliability of the customer.

The criteria vary from customer to customer. It is based on the financial profile and credit history.

3. Elaborate the steps that need to be followed before granting customer credit.

Ans: If a business firm decides to offer credit terms to the customers, it should try to ensure that these customers will be both willing and able to pay in accordance with the agreed-upon terms. It is recommended that the firms follow a structured process for this. 

Therefore, a firm may consider the following steps:

(i) Create credit policy: Every retail store must create its credit policy. It will help the store in running the retail business. It includes payment policies and expectations.

(ii) Customers must complete the credit application: The application should provide key information about the customers.

(iii) Check the customer’s references: Asking customers to list references also helps.

(iv) Run credit check: It will help in revealing any outstanding payments against the customer.

(v) Request personal guarantee from customer: It is not necessary in the case of a retail store, however, it is a personal guarantee from the customer.

(vi) Take security interest in products: As customers can refuse to pay according to the agreed upon terms, a retailer should ideally charge security interests.

(vii) Set credit limits and payment terms: Set limits for the customer who seems to be creditworthy. Also decide how many days after the delivery of the products the full payment will be made.

4. How is the credit report of a customer obtained?

Ans: Customers provide the necessary information for credit purchase. A retailer accesses the information and makes a report. The retailer can directly ask the customers for their creditworthiness and write it in their credit report.

G. Check your performance:

1. Demonstrate the legal and company procedures to be followed for carrying out credit checks.

Ans: A person’s credit history is private. Therefore, a retail firm needs to seek permission from the customer before accessing any information legally. The retailer should ensure that the customer has filled a credit application form and signed it. A customer should be made aware of the terms and conditions of the credit offered. There are company procedures to carry out a credit check of a customer and the information collected must not be used for any purpose other than the intended purpose. The retailer must maintain customer confidentiality while carrying out a credit check.

2. Draw a chart on the steps to be followed before granting customer credit.

Ans: Chart on Steps Before Granting Customer Credit:

+————————————————————+

|  STEPS TO BE FOLLOWED BEFORE GRANTING CREDIT |

+————————————————————+

            ↓

+————————————————————+

| (i) Create Credit Policy                                     |

| → Define payment rules and expectations.     |

+————————————————————+

            ↓

+————————————————————+

| (ii) Customer Fills Credit Application  |

| → Collects personal and financial information.|

+————————————————————+

            ↓

+————————————————————+

| (iii) Check Customer’s References  |

| → Helps verify credit reputation. |

+————————————————————+

            ↓

+————————————————————+

| (iv) Run Credit Check   |

| → Identifies outstanding dues and repayment history.|

+————————————————————+

            ↓

+————————————————————+

| (v) Request Personal Guarantee (if needed)  |

| → Acts as added assurance for repayment.   |

+————————————————————+

            ↓

+————————————————————+

| (vi) Take Security Interest in Products   |

| → Secures goods in case of non-payment.  |

+————————————————————+

            ↓

+————————————————————+

| (vii) Set Credit Limit & Payment Terms |

| → Fix maximum purchase limit and due date of payment.|

+————————————————————+

A. Fill in the blanks:

1. ___________ is the formal request by a customer to a seller to sell the desired goods on conditions agreed upon.

Ans: Requisition.

2. A _____________________ is a request for credit.

Ans: Credit requisition.

3. _______________ refers to the maximum amount of money extended to a customer through line of credit.

Ans: Credit limit.

4. Normally, credit limits are prescribed by the ________________.

Ans: Vendors.

B. Multiple choice questions:

1. When a requisition is made by a buyer to the seller to provide credit facility for the purchase of goods, it is known as _______________.

(a) Purchase requisition.

(b) Requisition.

(c) Credit requisition.

(d) None of the above.

Ans: (c) Credit requisition.

2. Vendors, usually, set _______________ based on information in the application of the person seeking credit.

(a) Credit limit.

(b) Debit limit.

(c) Standard limit.

(d) None of the above.

Ans: (a) Credit limit.

3. The credit requisition document requires information about the ______________.

(a) Items which are not desired.

(b) Desired items or services.

(c) General information.

(d) None of the above.

Ans: (b) Desired items or services.

4. _______________ is the performance criteria to be followed for processing applications from retail customers for credit facilities.

(a) Identifying the customer’s needs for credit facilities.

(b) Not identifying the customer’s needs for credit facilities.

(c) Both (a) and (b).

(d) None of the above.

Ans: (a) Identifying the customer’s needs for credit facilities.

C. State whether the following are True or False:

1. Requisition is an informal request by a customer to a seller.

Ans: False.

2. Credit requisition should contain information about the delivery instruction of goods.

Ans: True.

3. Credit processing application does not provide time to customers for clarification.

Ans: False.

4. Once approved, the application goes to the sales manager.

Ans: True.

D. Match the columns:

Ans:

E. Short answer questions:

1. What is credit requisition?

Ans: A credit requisition is a request for credit. A valid credit requisition includes the amount and type of credit requested. It also includes the applicant’s credit score, report and means of security for the loan. Normally, credit limits are prescribed by the vendor.

2. What is requisition?

Ans: Requisition is a formal request by a buyer to the seller to sell the desired goods on conditions agreed upon. It, generally, includes the brand and model name, quantity and the required delivery date, etc. When a requisition is made by a buyer to the seller to provide credit facility for the purchase of goods it is known as ‘credit requisition’. The rules for availing credit facilities are normally provided by the organisation.

F. Long answer questions:

1. Explain the information required in credit requisition.

Ans: The credit requisition document requires information about the following:

(i) Desired items or services: Customers who are seeking credit facility must mention the details of the desired items or services to be purchased on credit from the retail store.

(ii) Possible vendors to fulfill order: It must contain the details of the possible vendors who can supply the required goods to the customer or buyer.

(iii) Any budget quotations or proposals received: It should contain information about the vendor’s name and other details of quotations or proposals received.

(iv) Delivery instructions: The credit requisition should contain information about delivery instructions of the goods.

(v) Capture initial capital details: The detailed information about initial capital must be provided in the credit requisition.

(vi) Contact information: The buyers who want to purchase goods on credit must mention their contact information in this requisition.

(vi) Related accounting detail: It should also provide information about related details of accounting.

2. Discuss the process of credit application.

Ans: The process of credit application are as follows:

(i)  Identify the customer’s needs and provide credit facilities.

(ii) Clearly explain the features and conditions of credit facilities to the customer.

(iii) The customer should submit the application, and the requisition must be approved by the retailer.

(iv) Promptly refer to difficulties in processing applications.

(v) Once approved, the requisitions go to the sales  manager for authorisation procedures.

G. Check your performance:

1. Draw a chart on credit requisition.

Ans: Credit Requisition Chart:

+———————————————-+

| CREDIT REQUISITION PROCESS |

+———————————————-+

        ↓

+———————————————-+

| A credit requisition is a request for credit. |

+———————————————-+

        ↓

+———————————————-+

| Includes amount and type of credit requested.|

+———————————————-+

        ↓

+———————————————-+

| Includes applicant’s credit score and report.|

+———————————————-+

        ↓

+———————————————-+

| Includes security or guarantee for the loan. |

+———————————————-+

        ↓

+———————————————-+

| Vendor prescribes credit limit.         |

+———————————————-+

        ↓

+———————————————-+

| Credit limit = Max. amount customer can use|

| in a retail store through line of credit.|

+———————————————-+

2. Demonstrate the steps involved in credit requisition.

Ans: The steps involved in credit requisition are:

(i) Desired items or services: Customers who are seeking credit facility must mention the details of the desired items or services to be purchased on credit from the retail store.

(ii) Possible vendors to fulfill order: It must contain the details of the possible vendors who can supply the required goods to the customer or buyer.

(iii) Any budget quotations or proposals received: It should contain information about the vendor’s name and other details of quotations or proposals received.

(iv) Delivery instructions: The credit requisition should contain information about delivery instructions of the goods.

(v) Capture initial capital details: The detailed information about initial capital must be provided in the credit requisition.

(vi) Contact information: The buyers who want to purchase goods on credit must mention their contact information in this requisition.

(vi) Related accounting detail: It should also provide information about related details of accounting.

A. Fill in the blanks:

1. ________________ is a valuation performed by the retailer that determines the possibility of a customer to default on his or her debt obligations.

Ans: Creditworthiness.

2. When retailers extend credit to their customers, they are essentially providing the customers a loan equal to the amount of their _______________.

Ans: Purchases.

3. ________________ measures the creditworthiness of the customers.

Ans: Credit reporting agencies.

4. _______________ is a customer’s financial net worth.

Ans: Capital.

B. Multiple choice questions:

1. Payment or credit history depicts how a person meets debt obligations, which establishes ________________ of a person.

(a) Personal history.

(b) Creditworthiness or the financial character.

(c) Non-financial character.

(d) None of the above.

Ans: (b) Creditworthiness or the financial character.

2. A high credit score provides ___________________.

(a) Low creditworthiness.

(b) High creditworthiness.

(c) Moderate creditworthiness.

(d) None of the above.

Ans: (b) High creditworthiness.

3. _______________ is the borrower’s net worth.

(a) Drawings.

(b) Capital.

(c) Risk.

(d) None of the above.

Ans: (b) Capital.

4. Creditworthiness of customers can also be determined by studying and analysing ______________ of business.

(a) Income statement and balance sheet.

(b) Income statement only.

(c) Balance sheet only.

(d) None of the above.

Ans: (a) Income statement and balance sheet.

5. __________________ measure the creditworthiness of the customers.

(a) Credit reporting agencies.

(b) Agencies.

(c) Marketers.

(d) None of the above.

Ans: (a) Credit reporting agencies.

C. State whether the following are True or False:

1. Payment or credit history depicts how a person meets debt obligations.

Ans: True.

2. Creditworthiness is the valuation performed by borrowers.

Ans: False.

3. Creditworthiness can be increased by paying bills on time.

Ans: True.

D. Match the columns:

Ans:

E. Short answer questions:

1. Define creditworthiness.

Ans: Creditworthiness is a valuation performed by the retailer that determines the possibility of a customer to default based on his or her earlier debt obligations. It considers factors like repayment history and credit score. Credit reporting agencies measure the creditworthiness of a customer.

2. How can credit score be improved?

Ans: the minimum monthly payment, pay their debt faster and reduce the assessment of late fee to improve their credit score.

3. Which are the five Cs of credit?

Ans: The Five Cs of Credit’, which are as follows:

(i) Character: This refers to the customer’s integrity and willingness to repay the financial obligation.

(ii) Capacity: This addresses the customer’s cash inflow and ability to repay the debt.

(iii) Capital: This refers to the customers’ financial net worth.

(iv) Collateral: This refers to the security against credit.

(v) Conditions: These refer to the economic, family and personal conditions of the customers.

F. Long answer questions:

1. How do you check the creditworthiness of a customer?

Ans: A retailer before extending credit should verify a customer’s ability to repay, among other things. To keep an eye on the customers and their ability to pay what they owe.

The retailers should keep the following in mind:

(a) Require credit application: Every customer should be made to fill in the credit application.

(b) Check publicly available information: Every retailer must check the customer’s information before issuing credit.

(c) Use credit evaluation tools: A retailer must use credit evaluation tools to calculate the customer’s creditworthiness.

2. Explain the techniques used for determining credit worthiness of a customer.

Ans: When retailers want to expand the credit to their customers, they are essentially willing to provide the customers credit equal to the amount of their purchases.

The guidelines to be followed by the retailer is inclusive of ‘The Five Cs of Credit’, which are as follows:

(i) Character: This refers to the customer’s integrity and willingness to repay the financial obligation.

(ii) Capacity: This addresses the customer’s cash inflow and ability to repay the debt.

(iii) Capital: This refers to the customers’ financial net worth.

(iv) Collateral: This refers to the security against credit.

(v) Conditions: These refer to the economic, family and personal conditions of the customers.

G. Check your performance:

1. Make a presentation on checking the creditworthiness of a borrower.

Ans: Checking the Creditworthiness of a Borrower:

Focus: Retailer’s Perspective

Presented by: [Your Name]

Slide 1: Introduction

• Retailers often extend credit to customers.
  
• Verifying a customer’s ability to repay is essential.
  
• Helps prevent payment defaults and financial loss.
  

Slide 2: Why Check Creditworthiness?

• Avoids bad debts.
  
• Maintains financial health of the business.
  
• Builds a trustworthy customer base.
  
• Helps in making informed credit decisions.
  

Slide 3: Key Steps in Verifying Customer Creditworthiness

(a) Require Credit Application:

• Collect personal and financial details.
  
• Includes name, contact, employment status, income, references.
  
• Forms the basis for further credit checks.
  

Slide 4: Key Steps (continued)

(b) Check Publicly Available Information:

• Verify identity through public records.
  
• Check for legal cases, bankruptcies, or defaults.
  
• Cross-check any claims made in the application.
  

Slide 5: Key Steps (continued)

(c) Use Credit Evaluation Tools:

• Use software or scoring systems to assess risk.
  
• Tools analyze credit score, debt-to-income ratio, and payment history.
  
• Helps in objectively deciding whether to extend credit.

Slide 6: Benefits of the Process

• Minimizes risk of financial loss.
  
• Ensures repayment capability.
  
• Builds a responsible lending process.
  
• Improves customer selection.
  

Slide 7: Conclusion

• Proper credit evaluation protects the retailer and supports business growth.
  
• A disciplined approach ensures better cash flow and customer relationships.
  

Slide 8: Thank You

• Questions & Discussion
  
• [Your Contact Info]

2. Demonstrate the knowledge of the techniques used for determining the creditworthiness of customers.

Ans: When retailers want to expand the credit to their customers, they are essentially willing to provide the customers credit equal to the amount of their purchases. 

The guidelines to be followed by the retailer is inclusive of ‘The Five Cs of Credit’, which are as follows:

(i) Character: This refers to the customer’s integrity and willingness to repay the financial obligation.

(ii) Capacity: This addresses the customer’s cash inflow and ability to repay the debt.

(iii) Capital: This refers to the customers’ financial net worth.

(iv) Collateral: This refers to the security against credit.

(v) Conditions: These refer to the economic, family and personal conditions of the customers.

Parimol

Hi! my Name is Parimal Roy. I have completed my Bachelor’s degree in Philosophy (B.A.) from Silapathar General College. Currently, I am working as an HR Manager at Dev Library. It is a website that provides study materials for students from Class 3 to 12, including SCERT and NCERT notes. It also offers resources for BA, B.Com, B.Sc, and Computer Science, along with postgraduate notes. Besides study materials, the website has novels, eBooks, health and finance articles, biographies, quotes, and more.