Ch. 16 Current Accounts Management

What are accruals and what is their rule in short-term financing?

• they represent taxes/wages earned, they increase automatically and expand a firm’s operations.

• Accruals short-term debt is free since there is no explicit interest paid on them

What is free-trade credit?

Credit received during the discount period (from supplier with no explicit cost attached)

What is costly-trade credit?

Credit in excess of free trade credit (credit taken by a company from vendor in access of free trade credit)

How might a hospital that expects to have a cash shortage sometime during the coming year make sure that needed funds will be available?

They would take out a short-term loan since they can be obtained much faster and does not require long-term debt commitments

What is the current asset most commonly pledged as security for short-term loans?

Pledging/selling of accounts receivable

What is meant by the statement “firms cannot ordinarily control the number of accruals on its balance sheet”?

the timing of wages is set by the economic forces and sector custom, and tax payment dates are established by law

Another word for trade credit

accounts payable

What is a credit policy?

a business rules and regulations regarding granting credit and collecting from buyers that take credit; for healthcare providers the businesses policy regarding self-pay and indigent patients

what should businesses do with free trade credit?

use of it that they can obtain

What should businesses do with costly trade credit?

only use if it is less expensive than alternative sources of short term debt

Bank loans are an important source of short-term credit, when a bank loan is approved, what is signed?

promissory note

banks sometimes require borrowers to maintain compensating balances, what is meant by that?

• deposit requirements set between 10-20% of the loan amount.

• they raise the effective rate of interest on bank loans

What are lines of credit or “revolving credit agreements”?

formal understandings between the bank and the borrower in which the bank agrees to extend some maximum amount of credit to the borrow over some specified period

what does it mean to borrow on a secured basis?

the borrower uses assets, primarily accounts receivable in the healthcare sector, as collateral for the loan