1) What are the four elements of a firm's credit policy? To what extent can firms set their own credit policies as opposed to accepting policies that are dictated by its competitors?

2. From the standpoint of the borrower, is long-term or short-term credit riskier? Explain.

3.Distinguish between operating leases and financial (capital) leases. Would you be more likely to find an operating lease employed for a fleet of trucks or for a manufacturing plants?

Answer:

The four elements in a firm’s credit policy are (1) credit
standards,
(2) credit period, (3) discount policy, and (4) collection
policy.

The firm is not required to accept the credit policies
employed by its competition, but the optimal credit policy cannot
be determined without considering com-petitors’ credit policies.
A firm’s credit policy has an important influence on its volume
of sales, and thus on its profitability.

Short Term credit is way risker, most people that borrow short term just need a small amount of money that they know they can pay off quickly. But if you dont know when you can pay it off then it is better to go long term. Make sure you check the specifics of the plan. For example if you borrow $200 and interest is 20% a month but you can pay it back before the month then it is better then going long term where it may be .4% daily.

• Major difference between a finance lease and operating lease lies in the ownership of the asset. Whereas risk and rewards are with the lessee in case of finance lease, they lie with the lessor in case of an operating lease.
• Another difference is the manner in which the lease gets reported in financial statements. In case of finance lease, asset is shown on the asset side of the balance sheet, whereas rentals are shown on the side of the liabilities of the balance sheet. On the other hand, an operating lease is shown as operating expense in profit and loss statement.


If the lease is classified as an operating lease, the monthly lease payments are simply treated as rental expenses and recognized on the income tax return as they are incurred. There is no recognition of a leased asset or liability.hence we can find an operating lease employed for a fleet of trucks or for a manufacturing plant