The most common items accrued by a firm are wages and

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Unformatted text preview: as yet to be 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 America. Unlike the retailer above, e-tailer Amazon, despite its size and marketing success, pays its suppliers on time amidst i...
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This document was uploaded on 01/19/2014.

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