In this chapter well explain how to use these

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Unformatted text preview: uals—and commercial paper. In this chapter, we’ll explain how to use these strategies to the firm’s advantage. Y 635 636 PART 5 LG1 LG2 Short-Term Financial Decisions 15.1 Spontaneous Liabilities spontaneous liabilities Financing that arises from the normal course of business; the two major short-term sources of such liabilities are accounts payable and accruals. unsecured short-term financing Short-term financing obtained without pledging specific assets as collateral. Spontaneous liabilities arise from the normal course of business. The two major spontaneous sources of short-term financing are accounts payable and accruals. As the firm’s sales increase, accounts payable increase in response to the increased purchases necessary to produce at higher levels. Also in response to increasing sales, the firm’s accruals increase as wages and taxes rise because of greater labor requirements and the increased taxes on the firm’s increased earnings. There is normally no explicit cost attached to either of these current liabilities, although they do have certain implicit costs. In addition, both are forms of unsecured short-term financing—short-term financing obtained without pledging specific assets as collateral. The firm should take advantage of these “interestfree” sources of unsecured short-term financing whenever possible. Accounts Payable Management Hint An account payable of a purchaser is an account receivable on the supplier’s books. Chapter 14 highlighted the key strategies and considerations involved in extending credit to customers. Accounts payable are the major source of unsecured short-term financing for business firms. They result from transactions in which merchandise is purchased but no formal note is signed to show the purchaser’s liability to the seller. The purchaser in effect agrees to pay the supplier the amount required in accordance with credit terms normally stated on the supplier’s invoice. The discussion of accounts payable here i...
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