Question; You are in charge of accounts payable decisions for a large retailer.

Question

Question;

You are in charge of accounts payable decisions for a large retailer. You have a supplier who offers cash discount terms of 2/10 net 30 on all purchases. Passing up this discount is equivalent to borrowing from the supplier at 37.24%, while you are able to borrow short-term from your bank at 12%. However, the supplier relies on your firm for most of its sales and you could easily stretch the accounts payable period (net only) to 2/10 net 90. This allows you to effectively borrow from the supplier at 9.31%, saving your firm money when compared to the option of borrowing at 15% from the bank. a. Should you stretch your accounts payable with this supplier? Why or why not?(30 points) Answer here:

b. Which of the following conditions that would cause you to change your answer to part a?

Would either of these situations raise any ethical questions?(40 points)

i. You watch Jim Cramer’s Mad Money and learn that a small technology stock is almost certain to increase sharply in price in the next 30 days. However, to make the funds available to purchase the stock for your firm you need to stretch your payables from the supplier by at least 30 days.

ii. Your boss has informed you that the size of your Holiday bonus depends on your ability to increase your firm’s average payment period. Since the average payment period equals the accounts payable divided by average daily purchases, stretching payables will allow you to earn the bonus that you have been expecting.(70 Points in total)

Explanation / Answer

Part A)

While stretching the payables period does provide an opportunity to cover up for the cash discounts foregone, it is not considered an ethical practice to extend the payment period without the consent of the supplier. If a company makes delayed payments, it is acting unethically as it is violating the trade credit agreement entered into with the supplier.

Delayed payments basically take the form of a short term loan, about which the seller/supplier has no knowledge, while the buyer enjoys credit at a much lower rate of interest.

Another important factor is that financial statements are also evaluated by creditors from time to time, to study the financial credibility of the company. A company with a very high payables period may not be considered good for extending credit and in some cases, it may become difficult to obtain credit from suppliers in the market. In the given case also, the supplier is largely dependent on the company for its sales. Without receipt of payments on time, the concerned supplier won't be able to procure, source and supply material/products to the company, which in turn may affect the company's own business.

________

B)

None of the conditions provided should change the answer to Part A). Just because the company needs to invest in a stock which may have a good future potential, it is not ethical to retain the payment of suppliers, who are supplying material to the company in good faith. Also, linking bonus with average payment period is completely incorrect and not ethical. The payables period should be in line with the industry standards and as per the best practices followed by businesses in the industry.

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