Presented by Group 3

Current Liabilities
Management
Spontaneous
Liabilities 01. Accounts Payable

Financing that arises from the

normal course of business; the two
major short-term:
02. Accruals

unsecured short-term financing

Short-term financing obtained without pledging specific assets as collateral.
“Interest-free”
Accounts Payable Management
Management by the firm of the time that elapses
between its purchase of raw materials and its mailing
payment to the supplier.

Accounts Payable
• major source of unsecured short-term financing
• transactions in which merchandise is purchased
but no formal note is signed to show the
purchaser’s liability to the seller
• an agreement with credit terms normally stated
on the supplier’s invoice
 Role in the Cash When the seller of goods charges
no interest and offers no discount

Conversion Cycle to the buyer for early payment, the

buyer’s goal is to pay as slowly as
possible without damaging its
Average payment period: credit rating.

01. 02.
payment float time
the time from (the time it takes • Usually net 30/ 30days from the
after the firm mails beginning of the credit priod
the purchase of • typically either the date of invoice or
its payment until the
raw materials supplier has the end of the month (EOM)
• some firms offer an explicit or
until the firm withdrawn spendable
funds from the firm’s implicit “grace period” that extends a
mails the few days beyond the stated payment
account)
payment date
Example:
Example:
Analyzing Credit Terms
Taking the Cash Discount
If a firm intends to take a cash
discount, it should pay on the last
day of the discount period. There is
no added benefit from paying earlier
than that date.
Analyzing Credit Terms
Giving Up the Cash Discount
If the firm chooses to give up the cash
discount, it should pay on the final day of the
credit period. There is an implicit cost
associated with giving up a cash discount.

cost of giving up a cash discount

is the implied rate of interest paid to delay
payment of an account payable for an
additional number of days.
Example:
Example:
Example:
Stretching Accounts Payable
Paying bills as late as possible without
damaging the firm’s credit rating.

Although stretching accounts payable may be

financially attractive, it raises an important
ethical issue: It may cause the firm to violate
the agreement it entered into with its supplier
when it purchased merchandise. Clearly, a
supplier would not look kindly on a customer
who regularly and purposely postponed
paying for purchases.
Accruals
Liabilities for services received for which
payment has yet to be made.

The most common items accrued by a firm are

wages and taxes. Because taxes are payments to
the government, their accrual cannot be
manipulated by the firm. However, the accrual
of wages can be manipulated to some extent by
delaying payment of wages, thereby receiving
an interest-free loan from employees who are
paid sometime after they have performed the
work.
Thank you!
by Jessa Laus