Spontaneous FinancingAccounts Payable (Trade Credit from Suppliers)Accrued ExpensesTypes of spontaneous financing

Open Accounts: the seller ships goods to the buyer with an invoice specifying goods shipped, total amount due, and terms of the sale.Notes Payable: the buyer signs a note that evidences a debt to the seller.Trade Credit -- credit granted from one business to another. Examples of trade credit are:Spontaneous Financing

Draft -- A signed, written order by which the first party (drawer) instructs a second party (drawee) to pay a specified amount of money to a third party (payee). The drawer and payee are often one and the same.Trade Acceptances: the seller draws a draft on the buyer that orders the buyer to pay the draft at some future time period.Spontaneous Financing

Terms of the SaleNet Period - No Cash Discount -- when credit is extended, the seller specifies the period of time allowed for payment. Net 30 implies full payment in 30 days from the invoice date.COD and CBD - No Trade Credit: the buyer pays cash on delivery or cash before delivery. This reduces the sellers risk under COD to the buyer refusing the shipment or eliminates it completely for CBD.

Seasonal Dating -- credit terms that encourage the buyer of seasonal products to take delivery before the peak sales period and to defer payment until after the peak sales period.Net Period - Cash Discount -- when credit is extended, the seller specifies the period of time allowed for payment and offers a cash discount if paid in the early part of the period. 2/10, net 30 implies full payment within 30 days from the invoice date less a 2% discount if paid within 10 days.Terms of the Sale

Trade Credit as a Means of Financing$1,000 x 30 days = $30,000 account balanceWhat happens to accounts payable if a firm purchases $1,000/day at net 30?What happens to accounts payable if a firm purchases $1,500/day at net 30?$1,500 x 30 days = $45,000 account balanceA $15,000 increase from operations!

Cost to Forgo a DiscountApproximate annual interest cost = % discount365 days (100% - % discount) (payment date - discount period)What is the approximate annual cost to forgo the cash discount of 2/10, net 30 after the first ten days?X

Approximate annual interest cost = 2%365 days (100% - 2%) (30 days - 10 days)

= (2/98) x (365/20) = 37.2%What is the approximate annual cost to forgo the cash discount of 2/10, net 30, and pay at the end of the credit period?XCost to Forgo a Discount

Payment Date* Annual rate of interest 11744.9% 20 74.5 30 37.2 60 14.9 90 9.3* days from invoice dateThe approximate interest cost over a variety of payment decisions for 2/10, net ____.Cost to Forgo a Discount

S-t-r-e-t-c-h-i-n-g Account PayablesCost of the cash discount (if any) forgoneLate payment penalties or interestDeterioration in credit ratingPostponing payment beyond the end of the net (credit) period is known as stretching accounts payable or leaning on the trade. Possible costs of stretching accounts payable

Advantages of Trade CreditConvenience and availability of trade creditGreater flexibility as a means of financingCompare costs of forgoing a possible cash discount against the advantages of trade credit.

Who Bears the Cost of Funds for Trade Credit?Buyers -- when costs can be fully passed on through higher prices to the buyer by the seller.Both -- when costs can partially be passed on to buyers by sellers.Suppliers -- when trade costs cannot be passed on to buyers because of price competition and demand.

Accrued ExpensesWages -- Benefits accrue via no direct cash costs, but costs can develop by reduced employee morale and efficiency.Taxes -- Benefits accrue until the due date, but costs of penalties and interest beyond the due date reduce the benefits.Accrued Expenses -- Amounts owed but not yet paid for wages, taxes, interest, and dividends. The accrued expenses account is a short-term liability.

Trade liabilities, are those owed to suppliers. Trade Credit, Credit granted from one business to another.They are form of short-term financing common to almost all businesses. In fact, they are collectively the largest source of short-term funds for business firms.