NAME: Devienna Antonetta Sudiarto

NIM: 201950456

Chapter 16: Current Liabilities Management

16. 1. Spontaneous Liabilities

Spontaneous liabilities are financing that arises from the normal course of business;
the two major short-term sources of such liabilities are accounts payable and accruals.
Accounts payable management is management by the firm of the time that elapses
between its purchase of raw materials and its mailing payment to the supplier. The purchaser
must weigh the benefits of paying the supplier as late as possible against the costs of passing
up the discount for early payment.
1) Taking the Cash Discount, which means the purchaser should pay on the last day of
the discount period, and there is no added benefit from paying earlier than that date.
2) Giving Up the Cash Discount, for which there is a cost of giving up a cash discount
which is the implied rate of interest paid to delay payment of an account payable
for an additional number of days.
CD∨stated cash discount (%) 365
Cost of Giving Up Cash Discount = x
100 %−CD N
365
Approximate Cost of Giving Up Cash Discount = CD x
N
Accruals are liabilities for services received for which payment has yet to be made.
16. 2. Unsecured Sources of Short-Term Loans
The major type of loan made by banks to businesses is the short-term, self-liquidating
loan which is an unsecured short-term loan in which the use to which the borrowed money is
put provides the mechanism through which the loan ins repaid. Bank lend unsecured, short-
term funds in three basic ways: through single-payment notes, through lines of credit, and
through revolving credit agreements.
1) A single-payment note is a short-term, one-time loan made to a borrower who
needs funds for a specific purpose for a short period.
2) A line of credit is an agreement between a commercial bank and a business
specifying the amount of unsecured short-term borrowing the bank will make
available to the firm over a given period of time.
3) A revolving credit agreement is a line of credit guaranteed to a borrower by a
commercial bank regardless of the scarcity of money.
NAME: Devienna Antonetta Sudiarto
NIM: 201950456

16. 3. Secured Sources of Short-Term Loans

Secured short-term financing is short-term financing (loan) that has specific assets
pledged as collateral. The lender obtains a security interest in the collateral through the
execution of a security agreement, which is the agreement between the borrower and the
lender that specifies the collateral held against a secured loan.
Characteristics:
 Collateral & Terms: Lenders prefer collateral that has a duration closely matched
to the term of the loan; usually current assets.
 Institutions: The primary sources are commercial banks and commercial finance
companies.
Two commonly used means of obtaining short-term financing with accounts
receivable are pledging accounts receivable and factoring accounts receivable.
1) Pledge of Accounts Receivable is the use of a firm’s accounts receivable as
security, or collateral, to obtain a short-term loan.
2) Factoring Accounts Receivable, is the outright sale of accounts receivable at a
discount to a factor or other financial institution. A ‘factor’ is a financial institution
that specializes in purchasing accounts receivable from businesses.
Use of Inventory as Collateral:
1) Floating Inventory Liens, which are secured short-term loans against inventory
under which the lender’s claim in on the borrower’s inventory in general.
2) Trust Receipt Inventory Loan, which is a secured short-term loan against inventory
under which the lender advances 80 to 100 percent of the cost of the borrower’s
relatively expensive inventory items in exchange for the borrower’s promise to
repay the lender, which accrued interest, immediately after the sale of each item of
collateral.
3) Warehouse Receipt Loan, which is a secured short-term loan against inventory
under which the lender receives control of the pledged inventory collateral, which
is stored by a designated warehousing company on the lender’s behalf. Two types
of warehousing arrangements are:
 A terminal warehouse, which is a central that is used to store the merchandise of
various customers.
NAME: Devienna Antonetta Sudiarto
NIM: 201950456

 A field warehouse, under which the lender hires a field-warehousing company to

set up a warehouse to store the pledged collateral.