Explain the characteristics of secured short-term loans and the use of accounts receivable as short-term-loan collateral.

Current Liabilities Management

Learning Goals

  • LG 1 Review accounts payable, the key components of credit terms, and the procedures for analyzing those terms.
  • LG 2 Understand the effects of stretching accounts payable on their cost and the use of accruals.
  • LG 3 Describe interest rates and the basic types of unsecured bank sources of short-term loans.
  • LG 4 Discuss the basic features of commercial paper and the key aspects of international short-term loans.
  • LG 5 Explain the characteristics of secured short-term loans and the use of accounts receivable as short-term-loan collateral.
  • LG 6 Describe the various ways in which inventory can be used as short-term-loan collateral.

Why This Chapter Matters to You

In your professional life
ACCOUNTING You need to understand how to analyze supplier credit terms to decide whether the firm should take or give up cash discounts; you also need to understand the various types of short-term loans, both unsecured and secured, that you will be required to record and report.
INFORMATION SYSTEMS You need to understand what data the firm will need to process accounts payable, track accruals, and meet bank loans and other short-term debt obligations in a timely manner.
MANAGEMENT You need to know the sources of short-term loans so that, if short-term financing is needed, you will understand its availability and cost.
MARKETING You need to understand how accounts receivable and inventory can be used as loan collateral; the procedures used by the firm to secure short-term loans with such collateral could affect customer relationships.
OPERATIONS You need to understand the use of accounts payable as a form of short-term financing and the effect on one’s suppliers of stretching payables; you also need to understand the process by which a firm uses inventory as collateral.
In your personal life
Management of current liabilities is an important part of your financial strategy. It takes discipline to avoid viewing cash and credit purchases equally. You need to borrow for a purpose, not convenience. You need to repay credit purchases in a timely fashion. Excessive use of short-term credit, particularly with credit cards, can create personal liquidity problems and, at the extreme, personal bankruptcy.

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