Mini Case: 22 - 22 o. Is it likely that SKI could make significantly greater use of accruals? Answer: No, SKI could not make greater use of its accruals. Accruals arise because (1) workers are paid after they have actually provided their services, and (2) taxes are paid after the profits have been earned. Thus, accruals represent cash owed either to workers or to the IRS. The cost of accruals is generally considered to be zero, since no explicit interest must be paid on these items. The amount of accruals is generally limited by the amount of wages paid and the firm’s profitability, as well as by industry conventions regarding when wage payments are made and IRS regulations regarding tax payments. (Increasingly, Congress is putting businesses on a pay-as-you-go, or even pay-ahead-of-time basis through the use of estimated taxes.) A firm cannot ordinarily control its accruals. Firms use all the accruals they can, but they have little control over the levels of these accounts. p.
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