Understanding Credit and Its Functions

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Questions and Answers

What is one of the primary benefits of credit mentioned in the content?

It discourages saving.

It decreases purchasing power.

It limits economic activities.

It enables someone without financial resources to acquire goods. (correct)

How does credit contribute to business creation?

By discouraging prudent financial management.

By hindering the organization of business firms.

By offering vital funds necessary for start-ups. (correct)

By providing excessive liquidity without oversight.

What does judicious use of credit lead to?

More economic activities. (correct)

Reduced purchasing ability.

Increased debt without control.

Decreased saving rates.

What is a major goal of the Credit Management Association of the Philippines?

To promote credit consciousness among the public. Signup and view all the answers

In what way does credit enhance purchasing ability?

By providing additional liquidity through loans. Signup and view all the answers

What is one advantage of credit mentioned in the content?

Facilitates exchanges Signup and view all the answers

Which of the following is a disadvantage of credit?

It can lead to over-expansion of business activities. Signup and view all the answers

How can poor countries benefit from credit?

By increasing their economic activities. Signup and view all the answers

What is a misconception regarding bad credit?

It can always be eliminated. Signup and view all the answers

What relationship does credit have with risk management?

It works to avoid risks and losses. Signup and view all the answers

What is an installment account primarily used for?

Purchasing durable goods through monthly payments Signup and view all the answers

Which type of credit is suitable for purchasing goods used in a business?

Trade Credit Signup and view all the answers

What distinguishes straight loans from other types of loans?

They can be either secured or unsecured. Signup and view all the answers

In what scenario would a debtor most likely choose to use an installment account?

When acquiring a truck for a delivery business. Signup and view all the answers

What common characteristic do straight loans share with installment accounts?

Both can require collateral. Signup and view all the answers

What would NOT be a typical use of trade credit?

Financing a personal loan for tuition. Signup and view all the answers

What is a primary reason for businesses to utilize installment accounts?

To spread the cost of significant purchases over time. Signup and view all the answers

Which statement accurately describes the relationship between the debtor and the lender in straight loans?

The lender establishes the repayment terms based on policies. Signup and view all the answers

What is one economic function of credit?

It serves as a medium for exchanging goods and services. Signup and view all the answers

How does credit contribute to a company's profit targets?

By cooperating with sales and marketing to drive profits. Signup and view all the answers

What social function does credit serve?

Teaches debtors to develop good credit habits. Signup and view all the answers

What role does credit play in business promotion?

It facilitates the movement of goods through trade channels. Signup and view all the answers

What is a key benefit of utilizing credit for businesses?

It provides opportunities to adjust capital according to needs. Signup and view all the answers

Which of the following describes a rule established by credit?

Credit serves as a guideline for transactions and collections. Signup and view all the answers

What is a potential outcome of effective credit management?

Efficient collection of accounts receivable. Signup and view all the answers

How does credit affect savings behavior among individuals?

It encourages individuals to place funds in secure institutions. Signup and view all the answers

What main role does credit play in economic development as highlighted in the content?

It stimulates the salability of goods and services. Signup and view all the answers

How does credit affect the purchasing power of consumers?

It allows consumers to purchase goods and services they otherwise could not. Signup and view all the answers

What instruments does the Bangko Sentral use to provide credit in the market?

Certificates of indebtedness and government securities. Signup and view all the answers

What effect does credit have on the quality of products and services offered by manufacturers and sellers?

It incentivizes improvements in quality to boost sales. Signup and view all the answers

What is a significant impact of credit on wealth distribution?

It allows individuals without resources to acquire goods. Signup and view all the answers

In what way does credit contribute to business standards and practices?

It enhances operational practices through financial certainty. Signup and view all the answers

What is the relationship between credit and economic stagnation as mentioned in the content?

Economic stagnation occurs without credit availability. Signup and view all the answers

Which of the following statements about credit is true based on the information provided?

Credit is an essential tool for facilitating economic transactions. Signup and view all the answers

Study Notes

Credit - What it is and what it does

Functions: Credit plays a vital role in both the economic and social spheres.
- Economic function: Credit facilitates exchange, increases production volume, eliminates risks of distant payments, economizes money usage, and promotes savings.
- Social function: Credit fosters independence, reduces the need for hoarding, enables the management of funds, and encourages good credit practices.

Benefits of Credit

Business: Credit empowers those without financial resources to accumulate wealth. It enables the organization of business firms, funding start-ups and promoting growth.
Economic: Credit boosts purchasing power for individuals and businesses by increasing their access to funds. This leads to increased economic activity which can propel a country out of poverty and accelerate economic growth.

Disadvantages of Credit

Over-Expansion: Credit can lead to uncontrolled business growth and potential financial instability.
Risk Management: Credit requires careful management to minimize the risk of default and financial loss for lenders.

Types of Credit

Installment Accounts: Credit extended for large purchases like appliances, cars, and trucks, repaid in regular monthly installments.
Straight Loans: Loans in the form of money or its equivalent, provided by banks or financial institutions, repaid in installments or lump sums.
Trade Credit: Credit extended to businesses for purchases used in their operations, allowing for deferred payments.
Industrial Credit: Credit used by businesses for specific purchases, where the amortization is expected to come directly from the use of the purchased item, like cargo trucks for delivery businesses.

Importance of Credit to Business and the Economy

Efficiency: Credit streamlines the movement of goods and services, fostering production and maintaining a consistent flow of products to consumers.
Governance: Credit establishes a structured framework for credit and collection transactions, leading to efficient collection of accounts receivable.
Profitability: Credit can serve as a profit center, complementing sales and marketing efforts in businesses.
Monetary System: Credit acts as a key component of the monetary system, exemplified by government securities, bonds, and certificates of indebtedness.
Standard Enhancement: Credit incentivizes higher business standards and practices, encouraging improvements in product and service quality.

The Credit Management Association of the Philippines (CMAP)

Philosophy: CMAP emphasizes promoting credit consciousness, recognizing the vital role of credit professionals, and cultivating credit discipline among the Filipino populace.
Core Values: CMAP believes that credit is a critical tool for economic progress and that good credit practices are essential for individual and national prosperity.

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Description

This quiz explores the vital functions of credit in both economic and social contexts. It highlights the benefits credit provides to businesses and individuals while also addressing the potential disadvantages of credit over-expansion. Gain insights into how credit can influence wealth accumulation and economic growth.