Chap11_2009 - Chapter 11 Short-Term Financing Learning...

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Chapter 11 Short-Term Financing
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Learning Objectives After studying Chapter 11, you should be able to: Understand the sources and types of spontaneous financing. Calculate the annual cost of trade credit when trade discounts are forgone. Explain what is meant by "stretching payables" and understand its potential drawbacks. Describe various types of negotiated (or external) short- term borrowing. Calculate the effective annual interest rate on short-term borrowing with or without a compensating balance requirement and/or a commitment fee. Understand what is meant by factoring accounts receivable.
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• Spontaneous Financing • Negotiated Financing • Factoring Accounts Receivable • Composition of Short-Term Financing Topics
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Spontaneous Financing Types of spontaneous financing – Accounts Payable (Trade Credit from Suppliers) – Accrued Expenses
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Spontaneous Financing Trade Credit -- credit granted from one business to another. Examples: Open Accounts : the seller ships goods to the buyer with an invoice specifying goods shipped, total amount due, and terms of the sale. Notes Payable : the buyer signs a note that evidences a debt to the seller.
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Spontaneous Financing Draft -- A signed, written order by which the first party (drawer) instructs a second party (drawee) to pay a specified amount of money to a third party (payee). The drawer and payee are often one and the same. Trade Acceptances : the seller draws a draft on the buyer that orders the buyer to pay the draft at some future time period.
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COD and CBD - No Trade Credit : the buyer pays cash on delivery or cash before delivery . This reduces the seller’s risk under COD to the buyer refusing the shipment or eliminates it completely for CBD. Net Period - No Cash Discount -- when credit is extended, the seller specifies the period of time allowed for payment. “Net 30” implies full payment in 30 days from the invoice date. Spontaneous Financing: Open Account – Terms of Sales
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Net Period - Cash Discount -- when credit is extended, the seller specifies the period of time allowed for payment and offers a cash discount if paid in the early part of the period. “2/10, net 30” implies full payment within 30 days from the invoice date less a 2% discount if paid within 10 days. Seasonal Dating -- credit terms that encourage the buyer of seasonal products to take delivery before the peak sales period and to defer payment until after the peak sales period. Spontaneous Financing: Open Account – Terms of Sales
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Trade Credit as a Means of Financing $1,000 x 30 days = $30,000 account balance What happens to accounts payable if a firm purchases $1,000/day at “net 30”? What happens to accounts payable if a
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This note was uploaded on 07/06/2009 for the course BUS BAM314 taught by Professor Na during the Spring '09 term at 東京大学.

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Chap11_2009 - Chapter 11 Short-Term Financing Learning...

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