Current Liabilities Management

Question 1

Under what circumstances is the use of short-term financing most appropriate?

Answer 1

The use of short-term liabilities for financing purposes is most appropriate when the related assets financed will generate cash in the short-run to be able to repay the liabilities.

Question 2

Describe the characteristics of short-term borrowing.

Answer 2

Financing (borrowing or deferred payment) with payment due within one year or less; generally does not require collateral and does not impose restrictive covenants.

Question 3

What is the impact of being required to maintain a compensating balance on the cost of short-term borrowing?

Answer 3

Required compensating balances result in:

1. Less funds available than the amount borrowed and, therefore
2. Effective cost of borrowing is greater than the stated cost

Question 4

Give examples of short-term financing that is available only as needed.

Answer 4

1. Line of credit
2. Revolving credit
3. Letter of credit