Answered: How do firms use current liabilities,…

How do firms use current liabilities, including accounts payable, accruals, lines of credit, commercial paper and short-term loans, to finance current assets?

Principles of Accounting Volume 1

19th Edition

ISBN:9781947172685

Author:OpenStax

Publisher:OpenStax

Chapter12: Current Liabilities

Section: Chapter Questions

Problem 15Q: What business circumstance could produce a short-term notes payable created from a loan?

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Concept explainers

Functions of Financial Institutions

Financial institutions are businesses that are formed to deal with financial and monetary transactions. These organizations primarily accept deposits, advance loans, make investments, and provide foreign exchange services. Financial institutions include, but are not limited to, banks, insurance companies, trust companies, brokerage firms, and investment bankers. Because financial institutions play such an important role in the economy in terms of monetary transactions, regulating their activities has become a requirement for governmental authorities. As a result, the government creates a multitude of laws and regulations to oversee the activities of financial institutions.

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How do firms use current liabilities, including accounts payable, accruals, lines of credit, commercial paper and short-term loans, to finance current assets?

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How do creditors assess risk when lending funds to a company?
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What business circumstance could produce a short-term notes payable created from a loan?
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ability to pay short-term debts (does it have sufficient current assets to pay its current liabilities?) capital structure (are its assets financed more by debt or equity?) operational efficiency (how long does it take them to sell their inventory, collect receivables, or pay payables?)