Chapter 7 Managing Payable and Accruals

Order Order Placed Placed

Order Order Recei Recei ed ed

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Accounts Accounts # # Payable Payable $ $ In In oice oiceRecei Recei ed ed

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Payment Cash 'isb"rsed Copyright 2005 by Thomson Learning, Inc. PaymentSent Sent Cash 'isb"rsed

Learning Objectives

!pply time al"e o( money principles to the payment o( acco"nts payable. 'ecide )hen to ta*e a cash disco"nt (or early payment and )hen to pay at the end o( the credit period. +etter "nderstand the ethical iss"es in ol ed in payables beha ior. 'e elop appreciation (or role in(ormation systems play in managing payables. To de elop e((ecti e monitoring tools.
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Spontaneous Sources of Financing

'e(inition
a (inancing so"rce occ"rring spontaneo"sly (rom operations

,-amples
payables accr"als

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Accounts Payable

Open acco"nt Cash disco"nt ProSeasonal dating Consignment

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Payables Decisions and the Cash Flo !i"eline

Time Time&&$ &&$ P"rchase P"rchase 'ate 'ate Cash Cash 'isco"nt 'isco"nt'ate 'ate Credit Credit Period Period

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#asic Principles

.e er pay early, pay on the last day o(/

the disco"nt period, or the credit period

Ta*e a cash disco"nt )hen/

implied interest rate $ opport"nity rate

Stretch only as a last resort, not as a policy

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Pay"ent Decision Model

0hen days delayed # disco"nt period 0hen days delayed $ disco"nt period 0hen days delayed $ credit period

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$hen Days Delayed % Discount Period

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$hen Days Delayed & Discount Period

.P1 & IP 6 23 7 2''2*6895555

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$hen Days Delayed & Credit Period

IP - 23 72''4CP5-2(689555 .P1 & 4444444444444444444444444444444444 23 7 2''2*6895555

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!a'e or Leave a Discount

IP - 234d5 # IP 6 23 7 2CP4'P5-2*689555 * # 2d6234d55 - 289562CP4'P55

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(thics and the Pay"ent Decision

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Monitoring the Payables #alance

Payables t"rno er approach

Period p"rchases 6 !cco"nts payable

'ays p"rchases o"tstanding

!cco"nts payable 6 ! erage daily p"rchases

+alance (raction approach

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Accruals

'e(inition
an e-pense that has been inc"rred b"t has not yet been paid

T)o basic types

accr"ed )ages and salaries accr"ed interest and ta-es

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Su""ary

! cash disco"nt sho"ld be ta*en )hen the in estment6borro)ing rate is less than the ann"ali?ed disco"nt rate. Other)ise, pay at the end o( the credit period. Payment sho"ld not be stretched past the credit period. The balance (raction monitoring method is pre(erred o er the payables t"rno er method since t"rno er is in(l"enced by p"rchasing trends.

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