Page 372 - F1 Integrated Workbook STUDENT 2018

Chapter 22

1.1 Trade payables

Payables may be used as a source of short-term finance by delaying payment to
suppliers.

By paying on credit the entity is able to ‘fund’ its inventory of material through its
suppliers. To maximize this benefit, the entity should aim to pay as late as possible
without damaging its trading relationship with its suppliers.

If a cash discount is offered, the entity must weigh the saving from the discount
against the additional cost of borrowing the funds needed to finance the early
payment. The entity must also be aware of whether the funds are available to take up
the discount
Potential problems when paying
Benefits of paying suppliers late suppliers late

 alleviates cash flow difficulties  loss of any settlement discount
 cash can earn a return whilst still in  could obtain a poor credit rating
the paying entity's account  supplier may stop further supplies
 could face legal action

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