Working Capital - Current Liabilities

Question 1

Current liabilites

Answer 1

Forms of short-term financing

1) Short-term liabilities are most appropriately incurred in connection with assets which will generate cash in the short term to repay the liability.
2) Permanent amount of financing - some amount of current liabilities provides a permanent amount of financing. For example, extent a minimum balance always remains in trade accounts payable, that minimum amount is a form of permanent financing
3) short-term borrowing - does not require collateral and does not impose restrictive covenants
4) Early payment - discounts offered for early payment are usually significant
5) effective cost of borrowing - f current liabilities (e.g., short-term notes, line of credit, etc.) require maintaining a compensating balance (greater than any balance that would otherwise be maintained with the institution), the effective cost of borrowing is greater than the stated cost