Chapter 5: Accounts Payable Part 3 Flashcards
What is liquidity?
The ability of a business to meet its short-term debts as they fall due
When should accounts payable be paid ad why?
As close to the credit terms as possible, because this ensures the business continues to receive inventory on credit and can use its cash to meet other commitments
What do benchmarks allow?
The owner to assess whether the business is paying its accounts payable faster or slower
What do benchmarks include?
Performance in previous periods, expected performance or performance of similar businesses
What do the credit terms offered by suppliers set?
The maximum number of days for the business to pay
What happens if a business exceeds the credit terms offered by a supplier?
Negative consequences will occur such as strained relationships with suppliers, a reduction in credit rating anda loss of credit facilities
What is the effect on a business of a loss of credit facilities?
A business will have to purchase inventory with cash, and therefore the cash will not be available to make other purchases which could result in liquidity
What does purchasing inventory on credit allow business to do?
Be able to manage when they pay for their inventory and provide an important resource for managing liquidity
What does paying accounts payable on time ensure?
They will continue to provide ongoing access to credit facilities and its benefits
What can strong ethical considerations and personal relationships be useful for?
The management of accounts payable, because it allows for more trust and better credit terms with suppliers
What are some examples of non-financial information which can be critical in managing accounts payable?
The suppliers attitude to their credit terms, personal relationship with supplier and the strength of customer demand for products provided
How can a business ensure continuation of credit facilities?
They could contact accounts payable to negotiate an extended period to pay, or increase cash sales from accounts receivable
What happens if the discount revenue rate is very low?
The benefits of it may not justify the cost of paying early and not having the cash at hand to make other payments
What is the difference between GST and discount revenue?
GST is charged on the value of inventory, whereas discount revenue is charged on the total amount owing which includes inventory and GST
What is the difference between short and long term?
Short-term = Within 12 months (current) Long-term = After 12 months (non-current)
