In the context of financial accounting, what information would you expect to find about individuals who are described as 'credit risks'?

• A. They have a history of late payments or defaulting on loans.
• B. They are guaranteed approval for all types of credit.
• C. They consistently maintain a high credit score and pay debts on time.
• D. They are exempt from financial reporting requirements.

Answer: (A)

Verified step by step guidance

1. Understand the term 'credit risk': In financial accounting, 'credit risk' refers to the possibility that an individual or entity may fail to meet their financial obligations, such as repaying loans or making timely payments.
2. Analyze the options provided: Evaluate each statement to determine which aligns with the definition of 'credit risk' and the characteristics typically associated with individuals who pose a credit risk.
3. Option 1: 'They have a history of late payments or defaulting on loans.' This aligns with the definition of credit risk, as individuals with such a history are considered more likely to fail in meeting future financial obligations.
4. Option 2: 'They are guaranteed approval for all types of credit.' This does not align with the concept of credit risk, as individuals with high credit risk are less likely to be approved for credit due to their financial history.
5. Option 3: 'They consistently maintain a high credit score and pay debts on time.' This describes individuals with low credit risk, which is the opposite of the term being analyzed. Option 4: 'They are exempt from financial reporting requirements.' This is unrelated to the concept of credit risk and does not provide relevant information.