Current Liabilities ManagementSpontaneous 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.

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

 

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

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?

500,000 ________ = 12,500 per day 40

12,500 x 20 = Php 250,000

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%

 

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.