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Questions and Answers
What is the primary consideration for a printer's demand for immediate payment?
What type of creditors require a more formalized credit relationship?
What is a key factor that affects the cost of financing for a business?
Which type of institutional creditor is generally least willing to take credit risk?
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What influences a bank's willingness to take on credit risk over time?
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How would you describe the range of risk-taking for all banks during a given economic climate?
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What is the primary characteristic that distinguishes short-term debt from long-term debt?
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What is the term for debt that arises from credit extended by suppliers and other vendors?
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What is the primary reason why a supplier may not extend credit to a new business owner?
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What is an example of short-term debt?
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Why may a business owner need to establish creditworthiness with a supplier?
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What is the primary benefit of using trade credit for a business?
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What type of debt is typically used to finance payroll expenses?
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What is the primary distinction between short-term debt and long-term debt?
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Study Notes
Debt Classification
- Accountants recognize two basic categories of debt or liabilities: short-term and long-term.
- Short-term debt is expected to be paid within one year, while long-term debt exceeds one year.
Short-Term Debt
- Examples of short-term debt include:
- Outstanding invoices from suppliers
- Wages payable to employees between paydays
- Lines of credit from banks
- Payroll taxes due within a few days after payroll
Trade Credit
- Trade credit is the most common type of debt used by entrepreneurs.
- It arises from credit extended by suppliers and vendors.
- Example: Delayed payment for business cards from a local printer.
Institutional Creditors
- Institutional creditors require a more formalized credit relationship.
- Examples of short-term debt sources to manage cash flow:
- Banks
- Asset lenders
- Factors
- Each type of creditor takes differing levels of risk, affecting the cost of financing.
- Entrepreneurs should use the lowest-cost creditor possible based on business risk.
Banks
- Banks are the institutional creditors least willing to take credit risk, even on short-term lending.
- They face strict regulation and must meet demanding credit standards imposed by federal regulators.
- Banks' risk-taking is conservative and based on the overall strength of the economy.
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Description
Learn about the two basic categories of debt or liabilities: short-term and long-term, and understand the characteristics of each type. This chapter provides an overview of various types of debt and their repayment timings.
