Chap 7
15
Copyright Copyright 2005 by Thomson 2005 by Thomson Learning, Inc. Learning, Inc. Chapter 7 Chapter 7 Managing Payable and Accruals Managing Payable and Accruals Order Order Order Order Sale Sale Pa Pa Placed Placed Received Received < Inventory > < Receivable < Inventory > < Receivable Accounts Accounts Disbursement Disbursement < < Payable Payable > < > < Invoice Received Payment S Invoice Received Payment S
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Transcript of Chap 7
Copyright Copyright 2005 by Thomson Learning, Inc. 2005 by Thomson Learning, Inc.
Chapter 7Chapter 7Managing Payable and AccrualsManaging Payable and Accruals
OrderOrder Order Order Sale Sale Payment Sent Cash Payment Sent Cash PlacedPlaced Received Received Received Received Accounts CollectionAccounts Collection < Inventory > < Receivable > < Float >< Inventory > < Receivable > < Float >
Time ==>Time ==> Accounts Accounts Disbursement Disbursement
< < Payable Payable > < Float > > < Float > Invoice Received Payment Sent Cash DisbursedInvoice Received Payment Sent Cash Disbursed
OrderOrder Order Order Sale Sale Payment Sent Cash Payment Sent Cash PlacedPlaced Received Received Received Received Accounts CollectionAccounts Collection < Inventory > < Receivable > < Float >< Inventory > < Receivable > < Float >
Time ==>Time ==> Accounts Accounts Disbursement Disbursement
< < Payable Payable > < Float > > < Float > Invoice Received Payment Sent Cash DisbursedInvoice Received Payment Sent Cash Disbursed
Copyright Copyright 2005 by Thomson Learning, Inc. 2005 by Thomson Learning, Inc.
Learning ObjectivesLearning Objectives
Apply time value of money principles to the Apply time value of money principles to the payment of accounts payable.payment of accounts payable.
Decide when to take a cash discount for early Decide when to take a cash discount for early payment and when to pay at the end of the credit payment and when to pay at the end of the credit period.period.
Better understand the ethical issues involved in Better understand the ethical issues involved in payables behavior.payables behavior.
Develop appreciation for role information systems Develop appreciation for role information systems play in managing payables.play in managing payables.
To develop effective monitoring tools. To develop effective monitoring tools.
Copyright Copyright 2005 by Thomson Learning, Inc. 2005 by Thomson Learning, Inc.
Spontaneous Sources of FinancingSpontaneous Sources of Financing
DefinitionDefinition– a financing source occurring spontaneously from operationsa financing source occurring spontaneously from operations
ExamplesExamples– payablespayables
– accrualsaccruals
Copyright Copyright 2005 by Thomson Learning, Inc. 2005 by Thomson Learning, Inc.
Accounts PayableAccounts Payable
Open accountOpen account Cash discountCash discount ProxProx Seasonal datingSeasonal dating ConsignmentConsignment
Copyright Copyright 2005 by Thomson Learning, Inc. 2005 by Thomson Learning, Inc.
Payables Decisions and the Cash Payables Decisions and the Cash Flow TimelineFlow Timeline
Time ==>Time ==>
PurchasePurchase CashCash CreditCreditDateDate Discount DateDiscount Date PeriodPeriod
Time ==>Time ==>
PurchasePurchase CashCash CreditCreditDateDate Discount DateDiscount Date PeriodPeriod
Copyright Copyright 2005 by Thomson Learning, Inc. 2005 by Thomson Learning, Inc.
Basic PrinciplesBasic Principles
Never pay early, pay on the last day of:Never pay early, pay on the last day of:– the discount period, orthe discount period, or
– the credit periodthe credit period
Take a cash discount when:Take a cash discount when:– implied interest rate > opportunity rateimplied interest rate > opportunity rate
Stretch only as a last resort, not as a policyStretch only as a last resort, not as a policy
Copyright Copyright 2005 by Thomson Learning, Inc. 2005 by Thomson Learning, Inc.
Payment Decision ModelPayment Decision Model
When days delayed < discount periodWhen days delayed < discount period
When days delayed > discount periodWhen days delayed > discount period
When days delayed > credit periodWhen days delayed > credit period
Copyright Copyright 2005 by Thomson Learning, Inc. 2005 by Thomson Learning, Inc.
When Days Delayed < Discount When Days Delayed < Discount PeriodPeriod
NPV = IP x (1-d) / (1 + (DD(k/365)))NPV = IP x (1-d) / (1 + (DD(k/365)))
Copyright Copyright 2005 by Thomson Learning, Inc. 2005 by Thomson Learning, Inc.
When Days Delayed > Discount When Days Delayed > Discount PeriodPeriod
NPV = IP / (1 + (DD(k/365)))NPV = IP / (1 + (DD(k/365)))
Copyright Copyright 2005 by Thomson Learning, Inc. 2005 by Thomson Learning, Inc.
When Days Delayed > Credit PeriodWhen Days Delayed > Credit Period
IP x (1 +(DD-CP)x(f/365))IP x (1 +(DD-CP)x(f/365))NPV = ----------------------------------NPV = ---------------------------------- (1 + (DD(k/365))) (1 + (DD(k/365)))
Copyright Copyright 2005 by Thomson Learning, Inc. 2005 by Thomson Learning, Inc.
Take or Leave a DiscountTake or Leave a Discount
IP x (1-d) < IP / (1 + (CP-DP)x(k/365))IP x (1-d) < IP / (1 + (CP-DP)x(k/365))
k < (d/(1-d)) x (365/(CP-DP))k < (d/(1-d)) x (365/(CP-DP))
Copyright Copyright 2005 by Thomson Learning, Inc. 2005 by Thomson Learning, Inc.
Ethics and the Payment DecisionEthics and the Payment Decision
Top Tier: Make a commitment of the will to enhance the Top Tier: Make a commitment of the will to enhance the well-being of our neighborswell-being of our neighbors
Top Tier: Make a commitment of the will to enhance the Top Tier: Make a commitment of the will to enhance the well-being of our neighborswell-being of our neighbors
Middle Tier: The “Sun Light” test: Would both interested &Middle Tier: The “Sun Light” test: Would both interested &impartial observers find my decision to be prudent & sound.impartial observers find my decision to be prudent & sound.
Middle Tier: The “Sun Light” test: Would both interested &Middle Tier: The “Sun Light” test: Would both interested &impartial observers find my decision to be prudent & sound.impartial observers find my decision to be prudent & sound.
Lower Tier: Does the decision obey the intent and letter Lower Tier: Does the decision obey the intent and letter of the law?of the law?
Lower Tier: Does the decision obey the intent and letter Lower Tier: Does the decision obey the intent and letter of the law?of the law?
Copyright Copyright 2005 by Thomson Learning, Inc. 2005 by Thomson Learning, Inc.
Monitoring the Payables BalanceMonitoring the Payables Balance
Payables turnover approachPayables turnover approach– Period purchases / Accounts payablePeriod purchases / Accounts payable
Days purchases outstandingDays purchases outstanding– Accounts payable / Average daily purchasesAccounts payable / Average daily purchases
Balance fraction approachBalance fraction approach
Copyright Copyright 2005 by Thomson Learning, Inc. 2005 by Thomson Learning, Inc.
AccrualsAccruals
DefinitionDefinition– an expense that has been incurred but has not yet been paidan expense that has been incurred but has not yet been paid
Two basic typesTwo basic types– accrued wages and salariesaccrued wages and salaries
– accrued interest and taxesaccrued interest and taxes
Copyright Copyright 2005 by Thomson Learning, Inc. 2005 by Thomson Learning, Inc.
SummarySummary
A cash discount should be taken when the A cash discount should be taken when the investment/borrowing rate is less than the investment/borrowing rate is less than the annualized discount rate.annualized discount rate.
Otherwise, pay at the end of the credit period.Otherwise, pay at the end of the credit period. Payment should not be stretched past the credit Payment should not be stretched past the credit
period.period. The balance fraction monitoring method is The balance fraction monitoring method is
preferred over the payables turnover method since preferred over the payables turnover method since turnover is influenced by purchasing trends.turnover is influenced by purchasing trends.
