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Chapter 16 2021

This document summarizes key concepts about managing current liabilities, including accounts payable. It discusses credit terms, analyzing costs of giving up cash discounts, and stretching accounts payable. Specifically, it covers how stretching accounts payable can reduce the cost of giving up cash discounts by delaying payment. It also provides examples of how delaying payroll payment through extended pay periods provides low-cost financing for companies.

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Rabie Haroun
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71 views

Chapter 16 2021

This document summarizes key concepts about managing current liabilities, including accounts payable. It discusses credit terms, analyzing costs of giving up cash discounts, and stretching accounts payable. Specifically, it covers how stretching accounts payable can reduce the cost of giving up cash discounts by delaying payment. It also provides examples of how delaying payroll payment through extended pay periods provides low-cost financing for companies.

Uploaded by

Rabie Haroun
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Chapter 16 Current Liabilities Management

16. 1 Review accounts payable, the key components of credit terms, and the procedures for
analyzing those terms.

1. Spontaneous unsecured financing has a specific interest cost associated with it that can be at a
fixed or floating rate.
2. Accounts payable results from transactions in which merchandise is purchased but no formal
note is signed to show the purchaser's liability to the seller.
3. In credit terms, EOM (End-of-Month) indicates that the accounts payable must be paid by the
end of the month in which the merchandise has been purchased.
4. Spontaneous liabilities such as accounts payable, and accruals represent a source of financing
that arise from the normal course of business.
5. In giving up a cash discount, the amount of the discount that is given up is the interest being
paid by a firm to keep its money by delaying payment for a number of days.

6. As sales increase, a company needs more inventory and more employees resulting in
________.
A) more accounts payable and accruals, and therefore increasing its spontaneous liabilities
B) less accounts payable and accruals, and therefore decreasing its spontaneous liabilities
C) more accounts payable and accruals, and therefore decreasing its spontaneous liabilities
D) less accounts payable and accruals, and therefore increasing its spontaneous liabilities

7. One of the most common designations for the beginning of the credit period is ________.
A) the end of a quarter
B) the date of invoice
C) 2/10
D) the transaction date

8. The cost of giving up a cash discount on a credit purchase is ________.


A) added on to the price of the goods in order to make payment quickly
B) deducted from the price of the goods in order to make payment quickly
C) the implied interest rate paid in order to delay payment for an additional number of days
D) the true purchase price of the goods

9. A firm purchased goods with a purchase price of $1,000 and credit terms of 1/10 net 30. The
firm paid for these goods on the 5th day after the date of sale. The firm must pay ________ for
the goods.
A) $990 B) $900 C) $1,000 D) $1,

10. If a firm gives up the cash discount on goods purchased on credit, the firm should pay
the bill ________.
A) as per its will
B) on the last day of the discount date
C) after the credit period
D) on the last day of the credit period

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11. A firm is offered credit terms of 2/10 net 45 by most of its suppliers but frequently does not
have the cash available to take the discount. The firm has a credit line available at a local bank at
an interest rate of 12 percent. The firm should ________.
A) give up the cash discount, financing the purchase with the line of credit
B) take the cash discount and pay on the 45th day after the date of sale
C) take the cash discount and pay on the first day of the cash discount period
D) take the cash discount, financing the purchase with the line of credit, the cheaper source.

12. A Mining company has extended credit terms of 3/15 net 30 EOM. The cost of giving up the
cash discount, assuming payment would be made on the last day of the credit period, is 75.26
percent. If the firm were able to stretch its accounts payable to 60 days without damaging its
credit rating, the cost of giving up the cash discount would only be ________.

A) 18.81% B) 18.25% C) 21.90% D) 25.09%

13. The cost of giving up a cash discount under the terms of sale 1/10 net 60 (assume a 360-day
year) is ________.

A) 7.3 percent B) 6.1 percent C) 14.7 percent D) 12.2 percent

16.2 Understand the effects of stretching accounts payable on their cost and the use of
accruals.

14. If a firm stretches its accounts payable, its cost of giving up a cash discount is increased.
15. It would be a financially sound decision to pay employees once every two weeks rather than
once a month.

16. When a firm stretches accounts payable without hurting its credit rating, the cost of giving up
a cash discount is ________.
A) reduced B) increased C) unaffected
D) increased or decreased depending on the opening accounts payable balance

17. Jannet Company, currently pays its employees at the end of a week. The weekly payroll totals
$400,000. If it were to extend the pay period to pay its employees 1 week later throughout an
entire year, the employees would in effect be lending the firm ________ for a year.
A) $400,000 B) $20,800,000 C) $4,800,000 D) $675,000

18. As part of a union negotiation agreement, the United Clerical Workers Union (UCWU)
conceded to be paid every two weeks instead of every week. A major firm employing hundreds
of clerical workers had a weekly payroll of $1,000,000 and the cost of short-term funds was 12
percent. The effect of this concession was to delay clearing time by one week. Due to the
concession, the firm ________.
A) realized an annual loss of $120,000
B) realized an annual savings of $120,000
C) increased its cash cycle
D) decreased its cash turnover

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