Exam 16: Current Liabilities Management

________ are liabilities for services received for which payment has yet to be made. The most common accounts are taxes and wages.

Seasonal build-ups of inventory and receivables are generally financed with

Under the floating inventory lien, the borrower is free to sell the merchandise and is expected to remit the amount lent against each item, along with accrued interest, to the lender immediately after the sale. The lender then releases the lien on the appropriate item.

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

Aunt Tilly's Feeds, Inc. is considering obtaining funding through advances against receivables. Total annual credit sales are $600,000, terms are net 30 days, and payment is made on the average of 30 days. Western National Bank will advance funds under a pledging arrangement for 13 percent annual interest. On average, 75 percent of credit sales will be accepted as collateral. Commodity Finance offers factoring on a nonrecourse basis for a 1 percent factoring commission, charging 1.5 percent per month on advances and requiring a 15 percent factor's reserve. Under this plan, the firm would factor all accounts and close its credit and collections department, saving $10,000 per year. (a) What is the effective interest rate and the average amount of funds available under pledging and under factoring? (b) Which plan do you recommend? Why?

A short-term self-liquidating loan is a secured short-term loan in which the use to which the borrowed money is put provides the mechanism through which the loan is repaid.

Accruals are liabilities for services received for which payment has yet to be made.

In pledging accounts receivable, the percentage advanced against the adjusted collateral is determined by the borrower based on its overall evaluation of the quality of the acceptable receivables and the expected cost of their liquidation.

A firm should take the cash discount if the firm's cost of borrowing from the bank is greater than the cost of giving up a cash discount.

Self-liquidating loans are mainly invested in productive assets (i.e., fixed assets) which provide the mechanism through which the loan is repaid.

Ashley's Delivery Service is analyzing the credit terms of each of three suppliers, A, B, and C. (a) Determine the approximate cost of giving up the cash discount. (b) Assuming the firm needs short-term financing, recommend whether or not the firm should give up the cash discount or borrow from the bank at 10 percent annual interest. Evaluate each supplier separately.

The risk to a U.S. importer with foreign-currency-denominated accounts payable is that the dollar will depreciate.

The cost of giving up a cash discount is the implied rate of interest paid in order to delay payment of an account payable for an additional number of days.

Self-liquidating loans are intended merely to carry the firm through seasonal peaks in financing needs, mainly buildups of accounts receivable and inventory.

Commercial paper is usually sold at a discount from

Lines of credit are non-guaranteed loans that specify the maximum amount that a firm can owe the bank at any point in time.

A firm arranged for a 120-day bank loan at an annual rate of interest of 10 percent. If the loan is for $100,000, how much interest in dollars will the firm pay? (Assume a 360-day year.)

Loans on which the interest is paid in advance are often called

Nonrecourse basis is the basis on which accounts receivable are sold to a factor with the understanding that the factor accepts all credit risks on the purchased accounts.

Much of the commercial paper is issued by