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made. The most common items accrued by a firm are wages and taxes. Because
taxes are payments to the government, their accrual cannot be manipulated by
the firm. However, the accrual of wages can be manipulated to some extent. This
is accomplished by delaying payment of wages, thereby receiving an interest-free
loan from employees who are paid sometime after they have performed the work.
The pay period for employees who earn an hourly rate is often governed by union
regulations or by state or federal law. However, in other cases, the frequency of
payment is at the discretion of the company’s management.
Tenney Company, a large janitorial service company, currently pays its employees at the end of each work week. The weekly payroll totals $400,000. If the firm
were to extend the pay period so as to pay its employees 1 week later throughout
an entire year, the employees would in effect be lending the firm $400,000 for a
year. If the firm could earn 10% annually on invested funds, such a strategy
would be worth $40,000 per year (0.10 $400,000). Review Questions
15–1 What are the two major sources of spontaneous short-term financing for a
firm? How do their balances behave relative to the firm’s sales?
15–2 Is there a cost associated with taking a cash discount? Is there any cost
associated with giving up a cash discount? How do short-term borrowing
costs affect the cash discount decision?
15–3 What is “stretching accounts payable”? What effect does this action have
on the cost of giving up a cash discount? CHAPTER 15 FOCUS ON ETHICS LG4 641 In Practice
Amazon Stays Ethical to Avoid
Biting the Hands That Feed It Top managers in a tiny central
Ohio company fret but say nothing
publicly as a giant retailer routinely
waits 120 days to pay its invoices
marked “due in 30 days.” The
credit manager is quiet, partly
because the company depends on
this key account for survival and
partly because “stretching
payables” is the most widespread
unethical practice in corporate
Unlike the retailer above,
e-tailer Amazon, despite its size
and marketing success, pays its
suppliers on time amidst i...
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