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Major Issues in Financial Management - Assignment Example

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The assignment "Major Issues in Financial Management" focuses on the critical analysis of the major issues in financial management. The amount set aside for a line of credit for the business = is $40 million. Interest rate =.615% per month (on a straight-line method)…
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Major Issues in Financial Management
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Extract of sample "Major Issues in Financial Management"

Short-term borrowing differs from spontaneous sources of liquidity as follows:

Spontaneous financing includes instantaneous sources of finances/ cash funds such as trade credit, and other accruals and payables which arise spontaneously within the daily operations of the firm (Kuhlemeyer, 81-89). It is based on policies concerning purchases, taxes, labour, and other expenses.

These sources of liquidity involve an arrangement or agreement between the company and its suppliers as well as providers of support services. Some of the consequences associated with these sources include foregoing cash discounts.

On the other hand, Short-term borrowing includes short-term sources of cash funds such as bank overdrafts and short-term loans (Kuhlemeyer, 81-92). A short-term loan is a loan given for at most three years. An overdraft is where the bank allows a customer to overdraw money from the bank, which happens within the bank's limits. A variable rate of interest is charged on the amount the corporation is overdrawndailys.

Short-term borrowing has a self-liquidating nature, where the company gets short-term loans, and uses them to get more inventory that in turn promotes the production of the final product to meet demand. Receivables as a result of the sales thereafter, become cash which is used to pay for the seasonal short-term loan and cover related long-term financing costs.

These sources of liquidity involve an agreement between a credit offering facility and the company. Therefore, a variable or fixed rate interest is always charged according to the policies and terms and conditions of the lender.

Accounting ratios:
The average credit sales for Jiffy Co. is = $375,000
The accounts Receivables average balance is = $68,000
Jiffy factors its receivables by discounting them at 3%
Therefore, with an invoice amount = $375,000 and a discounting rate of 3%
The cost of factoring on the invoice of $375,000 is =.03 x $375,000 = $11,250
And on the invoice amount of $68,000, the cost of factoring the receivables is = $2040
Therefore, the Effective cost of factoring of receivables is = total factoring fee (Kuhlemeyer 101-110) which is = $2040 + $11,250 = $13,290.

Accounting ratios:
Bob’s Hobby, annual average purchases are = $138,000
And the Bob’s Hobby, Ending accounts payable balance = $21,748
But the average Accounts payable is given by getting the sum of the beginning accounts payable balance and ending accounts payable balance and dividing it by 2 (Kuhlemeyer 12-15).

In this case, the beginning accounts payable balance is = $0, therefore, the average accounts payable for Bob’s Hobby is = (0 +21,748)/2 = $21,748/2 =$10,874.

With the annual average purchases and the average accounts payable it is possible to get the accounts payable turnover ratio which is the number of times the accounts payable are turned over or purchases paid for in a year.

Therefore, the accounts Payable Turnover ratio = $138,000/$10,874 = 12.690822145≈12.7 times.
Therefore, the accounts-payable account is turned over 12.7 times in one year.
But, a year has 365 days

This makes the period, on average that Bob’s takes to pay for its purchases to be the quotient/ratio of days in a year and the number of times accounts payables are turned over (Kuhlemeyer, 12-15).
Therefore, the period taken to pay for Bob’s purchases is = 365/12.7 = 28.74≈29 days.

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