After studying chapter 11, you should be able to: Understand the sources and types of spontaneous financing, calculate the annual cost of trade credit when trade discounts are forgone, explain what is meant by “stretching payables” and understand its potential drawbacks, describe the various types of negotiated (or external) short-term financing,. | Chapter 11 Short-Term Financing © 2001 Prentice-Hall, Inc. Fundamentals of Financial Management, 11/e Created by: Gregory A. Kuhlemeyer, . Carroll College, Waukesha, WI Short-Term Financing Spontaneous Financing Negotiated Financing Factoring Accounts Receivable Composition of Short-Term Financing Spontaneous Financing Accounts Payable (Trade Credit from Suppliers) Accrued Expenses Types of spontaneous financing 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. Terms of the Sale Net 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 seller’s risk under COD to the buyer refusing the shipment or eliminates it completely for CBD. Terms of the Sale 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. . | Chapter 11 Short-Term Financing © 2001 Prentice-Hall, Inc. Fundamentals of Financial Management, 11/e Created by: Gregory A. Kuhlemeyer, . Carroll College, Waukesha, WI Short-Term Financing Spontaneous Financing Negotiated Financing Factoring Accounts Receivable Composition of Short-Term Financing Spontaneous Financing Accounts Payable (Trade Credit from Suppliers) Accrued Expenses Types of spontaneous financing 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 .
