FNM105: Credit and Collection Lesson 1

Questions and Answers

What is an essential requirement for giving credit to an individual?

To have a written contract

To trust the individual (correct)

To ensure they have collateral

To know their income level

Credit can be defined as a 'sale on trust'.

True

What form of credit is obtained when purchasing goods from retail outlets?

Merchandise credit

A promise to pay between a debtor and creditor should be in _______.

writing Signup and view all the answers

Match the following concepts with their definitions:

Barter = Exchange of goods without money Economic self-sufficiency = Independence through self-production Credit = Ability to obtain a thing of value Debtor = An individual who owes a payment Signup and view all the answers

Which of the following is NOT a disadvantage of credit?

Facilitates wealth increase Signup and view all the answers

Credit refers to the ability to obtain goods or services without any promise to pay back.

False Signup and view all the answers

What is the Latin word meaning ‘to believe’ or ‘to trust’ that credit is derived from?

Credere/Credo Signup and view all the answers

The contract must identify the principal value of loan and the corresponding __________ for the credit period.

interest Signup and view all the answers

Match the following advantages of credit with their descriptions:

Facilitates wealth increase = Makes funds available for productive purposes Expands purchasing power = Allows businesses to buy more than their current funds permit Saves time and expenses = Provides a safer means to complete transactions Enables immediate consumption = Allows for instant access to goods without delay Signup and view all the answers

Study Notes

Credit Economy Overview

Credit is defined as a "sale on trust," requiring belief in the borrower’s ability to repay.
Represents a present right to receive a future payment as per MacLeod.
Goods or services can be received without immediate payment.

Learning Outcomes

Understand the historical evolution of credit.
Discuss the emergence of credit in business practices.
Identify challenges businesses face related to credit.

History of Credit

Barter system utilized goods exchange without money.
Economic self-sufficiency was a driving factor for the emergence of credit.
Transition to the use of money as a common medium of exchange began with ancient coins.

Nature of Credit

Credit provides the ability to obtain valuable goods or cash.
Essential forms of credit include cash credit from banks and non-cash (merchandise) credit from retailers.
A valid promise to pay must be documented, detailing principal amount, interest, and maturity date.

Definition of Credit

Derived from the Latin "Credere/Credo," meaning "to believe" or "to trust."
Credit is viewed as a debt that arose out of necessity, allowing acquisition of goods/services based on a promise to pay in the future.

Credit Agreement

A contractual relationship where a lender provides funds or goods to a borrower, who agrees to repay with interest.
Terms can include repayment on demand or at a specified future date.

Advantages of Credit

Facilitates wealth expansion by making necessary funds available.
Saves time and streamlines transactions, making them safer and more convenient.
Increases purchasing power for individuals and businesses.
Allows immediate consumption of goods, promoting economic activity.
Expands economic opportunities, fostering potential growth across various sectors.
Contributes to the development of new industries and improves customer convenience in purchasing.

Disadvantages of Credit

Can encourage speculative behavior leading to financial instability.
May contribute to excessive spending and extravagance.

Description

Explore the foundational concepts of credit and collection in this first lesson of the FNM105 course. Understand how credit operates as a 'sale on trust' and learn about the emerging challenges within the credit economy. This quiz will help reinforce key concepts and prepare you for future discussions.