Manage Current Liabilities with Trade Credit and Accruals
1. Current Liabilities Management
Spontaneous sources
Trade Credit (Accounts Payable)
Considered as a spontaneous financing because it is automatically obtained
when a firm purchases goods or services on credit from a supplier.
It is more readily available than other negotiated sources of short-term credit.
Stretching of Trade credit involves delaying payments beyond a prescribed
credit period. Continued violation of trade terms can eventually lead to a
stretch of credit. However for short periods, and at frequent intervals,
stretching may offer the firm an emergency source of short-term credit.
2. Cost of Trade Discount – trade credit usually bears no interest, but is not
costless. Its cost is implicit in the terms of credit agreed upon the discount
policy and the credit period.
No Trade Discount
Purchases on credit without trade discount are usually priced higher than cash
purchases. The difference between the selling prices is the implicit cost of
credit.
With Trade Discount
If a supplier allows a trade discount for prompt payment, an implicit cost is
incurred if the discount is not availed of
A
3. Annual Rate = Interest cost per period x Number of Days in a year
____________________ ________________________
Usable loan amount Number of days fund are used
Discount % x Number of Days in a year
____________________ ________________________
100% - Discount % Net period - Discount period
4. Exercise 9: Stretching Payables
Madam Baby Corporation’s suppliers sell merchandise to Madam Baby on
terms of 60 days. Despite this fact, the corporation pays its accounts, on the
average, in 40 days, so that its accounts payables average Php 500,000. The
corporation is now considering payment of its accounts payable to the end of
the term in order to decrease its cash requirements. How much is the expected
increase in accounts payable if payments are delayed to the 60th day?
6. Exercise 10: Annual Rate Computation
IFM Corporation purchased under the terms of 2/10, n/30. What is the nominal
cost of the trade credit? (Assume a 360 day year)
Annual Rate = Discount % x Number of Days in a year
____________________ ________________________
100% - Discount% Net period - Discount period
2% 360 days
____________________ x ________________________
100% - 2 % 30 days – 10 days
= 36.73%
7. Accrued expense
Another form of spontaneous financing, which represent liabilities for services
that have been provided to the company but have not yet been for typical
examples are accrued wages and taxes.
Deferred Income
Customers’ advance payments or deposits for goods or services that will be
delivered at some future date.