Statements about the flexibility, cost and riskiness of short-term versus long term debt depend to a large extent on the type of short-term financing that is actually used. Three major types of short-term financing--accruals, accounts payable and bank loans are used extensively. Explain how each of the three types are used for short term financing. Solution I fully endorse the statement that the fexibility, cost and riskiness of short-term debts have an impact on the determination of various financial instruments. Generally Long-term financing is meant for assets and projects whereas Short-term financing is primarily meant for continuation of operations. In other words long-term finacing includes equity issued, corporate bonds, capital notes etc.,short-term financing includes commercial papers, promissory notes, asset-based loans, accruals, accounts payable, bank loans, repurchase agreements, letters of credit etc.. The term Accruals are adjustments either for revenues that have been earned butare not yet recorded in the accounts or for expenses that have been incurred but are yet to be recorded in the accounts. Accruals on the balance sheet represents liabilities and non-cash based assets used in accural-based accounting. Accounts payable is money owed by an organization to its suppliers and is shown as a liability on the balance sheet. In other words Accounts payable is an accounting entry that represents an obligation to pay off a short-term debt to its creditors. It is recorded on the balance sheet as current liability. Bank loans are mostly considered to be best source for short-term financing on account of flexibility with low cost..

1. Statements about the flexibility, cost and riskiness of short-term versus long term debt depend to
a large extent on the type of short-term financing that is actually used. Three major types of
short-term financing--accruals, accounts payable and bank loans are used extensively. Explain
how each of the three types are used for short term financing.
Solution
I fully endorse the statement that the fexibility, cost and riskiness of short-term debts have an
impact on the determination of various financial instruments. Generally Long-term financing is
meant for assets and projects whereas Short-term financing is primarily meant for continuation
of operations. In other words long-term finacing includes equity issued, corporate bonds, capital
notes etc.,short-term financing includes commercial papers, promissory notes, asset-based loans,
accruals, accounts payable, bank loans, repurchase agreements, letters of credit etc..
The term Accruals are adjustments either for revenues that have been earned butare not yet
recorded in the accounts or for expenses that have been incurred but are yet to be recorded in the
accounts. Accruals on the balance sheet represents liabilities and non-cash based assets used in
accural-based accounting.
Accounts payable is money owed by an organization to its suppliers and is shown as a liability
on the balance sheet. In other words Accounts payable is an accounting entry that represents an
obligation to pay off a short-term debt to its creditors. It is recorded on the balance sheet as
current liability.
Bank loans are mostly considered to be best source for short-term financing on account of
flexibility with low cost.