S u m m a ry focus on value current liabilities

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Unformatted text preview: s that offer each of them. 15–14 For the following methods of using inventory as short-term loan collateral, describe the basic features of each, and compare their use: (a) floating lien; (b) trust receipt loan; and (c) warehouse receipt loan. S U M M A RY FOCUS ON VALUE Current liabilities represent an important and generally inexpensive source of financing for a firm. The level of short-term (current liabilities) financing employed by a firm affects its profitability and risk. Accounts payable are an inexpensive spontaneous source of shortterm financing. They should be paid as late as possible without damaging the firm’s credit rating. This strategy will shorten the firm’s cash conversion cycle and reduce its required investment in operating assets. If vendors offer cash discounts, the firm must consider the economics of giving up versus taking the discount. Accruals, another spontaneous liability, should be maximized because they represent free financing. Notes payable, which represent negotiated short-term financing, can be obtained from banks on an unsecured basis. They should be obtained at the lowest cost under the best possible terms. Large, well-known firms can obtain unsecured short-term financing through the sale of commercial paper. On a secured basis, the firm can obtain loans from banks or commercial finance companies, using either accounts receivable or inventory as collateral. 656 PART 5 Short-Term Financial Decisions The financial manager must obtain the right quantity and form of current liabilities financing in order to provide the lowest-cost funds with the least risk. Such a strategy should positively contribute to the firm’s goal of maximizing the stock price. REVIEW OF LEARNING GOALS Review the key components of a firm’s credit terms and the procedures for analyzing them. The major spontaneous source of short-term financing is accounts payable, which are the primary source of short-term funds. Accounts payable result from credit purchases of merchandise. The key features of this form of financing are summarized in part I...
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