Finance Basics: Delaying Cash Payments (B)
What is Supplier's Credit Credit? What are Accounts Receivable?
Posted: Apr 2009
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In order to delay some cash outflow payments and to help ease the pressure on its cash flow, a company may enter into negotiations with its suppliers.
When the supplier grants credit:
• on the cash flow statement there is no cash outflow for purchased goods.
• on the profit & loss statement the cost of the goods sold must still appear.
• on the balance sheet the money owed to the supplier appears as accounts payable under liabilities.
The money owed to the supplier will impact the cash outflow of the company in the period when the account is paid.
There are two means of financing the assets:
• Financing provided by the shareholders also called Owner's Equity
• Financing provided by other debtholders also called Other Liabilities
Owner's equity = Equity capital, retained earnings, profit/loss of the day.
Other liabilities = Loans, Account payable, ...
JS can increase sales, if the supply of sandwiches can be paid for later.
Fast Food Chain agrees to allow him to pay them the following day for the boxes of sandwiches they provides. So from now on all sandwich boxes ordered will be paid for the next day.
JS orders five sandwich boxes and goes back outside to carry on his business. Since everyone in the neighborhood is trustworthy, he collects all the money due from the credit he gave yesterday.
• The cost of goods purchased on credit does not appear on the current cash flow statement.
• Negotiating credit with suppliers can significantly improve cash flow.
• The cost of goods purchased on credit appears on the liabilities side of the balance sheet as accounts payable
• The profit & loss statement is not significantly affected by changes in payment terms.
• Accounts payable are another way of financing the assets
• Assets = Owner's Equity + Other liabilities
• Owner's Equity = Assets - Other liabilities
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