Fm Current Liabilities Management
CHAPTER 15
Current Liabilities Management
INSTRUCTOR’S RESOURCES
Overview
This chapter introduces the fundamentals and describes the interrelationship of net working capital, profitability, and risk in managing the firm's current liability accounts. The management of current liabilities requires choosing appropriate levels of financing and involves trade-offs between risk and profitability. This chapter also reviews sources of secured and unsecured short-term financing, including the role of international loans. Spontaneous sources, such as accounts payable and accruals, are differentiated from negotiated bank sources, such as lines of credit. The cash discount offered on accounts payable and the cost of forgoing the discount are described. Secured sources include bank and commercial finance company loans backed by collateral such as inventory or accounts receivable.
PMF DISK
This chapter's topics are not covered on the PMF Tutor or the PMF Problem-Solver.
PMF Templates
The following spreadsheet template is provided:
Problem Topic
15-8 Cost of bank loan
Study Guide
The following Study Guide examples are suggested for classroom presentation:
Example Topic 1 Loss of loan discounts 4 Accounts receivable as collateral
ANSWERS TO REVIEW QUESTIONS
15-1 The two key sources of spontaneous short-term financing (financing that arises from the normal operating cycle) are accounts payable and accruals. Both of these sources are spontaneous, since their levels increase and decrease directly with increases or decreases in sales. If sales increase, the firm will purchase more new materials, resulting in higher accruals of these items.
15-2 There is no cost(stated or unstated(associated with taking a cash discount; there is a cost of giving up a cash discount. By giving up a cash discount, the purchaser pays the full price for merchandise but can make the payment later. The unstated cost of giving up a cash discount is the
Current Liabilities Management
INSTRUCTOR’S RESOURCES
Overview
This chapter introduces the fundamentals and describes the interrelationship of net working capital, profitability, and risk in managing the firm's current liability accounts. The management of current liabilities requires choosing appropriate levels of financing and involves trade-offs between risk and profitability. This chapter also reviews sources of secured and unsecured short-term financing, including the role of international loans. Spontaneous sources, such as accounts payable and accruals, are differentiated from negotiated bank sources, such as lines of credit. The cash discount offered on accounts payable and the cost of forgoing the discount are described. Secured sources include bank and commercial finance company loans backed by collateral such as inventory or accounts receivable.
PMF DISK
This chapter's topics are not covered on the PMF Tutor or the PMF Problem-Solver.
PMF Templates
The following spreadsheet template is provided:
Problem Topic
15-8 Cost of bank loan
Study Guide
The following Study Guide examples are suggested for classroom presentation:
Example Topic 1 Loss of loan discounts 4 Accounts receivable as collateral
ANSWERS TO REVIEW QUESTIONS
15-1 The two key sources of spontaneous short-term financing (financing that arises from the normal operating cycle) are accounts payable and accruals. Both of these sources are spontaneous, since their levels increase and decrease directly with increases or decreases in sales. If sales increase, the firm will purchase more new materials, resulting in higher accruals of these items.
15-2 There is no cost(stated or unstated(associated with taking a cash discount; there is a cost of giving up a cash discount. By giving up a cash discount, the purchaser pays the full price for merchandise but can make the payment later. The unstated cost of giving up a cash discount is the