Finance: Applications and Theory

3rd Edition
by Marcia Cornett and Troy Adair and John Nofsinger
907 Solutions 20 Chapters 7821 Studied ISBN: 9780077861681 Finance 5 (1)

Chapters 15: 1

1.Why might current liabilities be considered a spontaneous source of funding for a firm?


Step-By-Step Solution

1.When a firm makes more products or provides more services, it will use more raw materials from its suppliers and more labor from its employees. To the extent such a firm gets trade credit from its suppliers, current liabilities will tend to “automatically” increase; likewise, since employers tend to pay employees in a delayed manner (e.g., think about the local high school kid working at the burger joint down the road: if she works tonight, she will probably receive a paycheck for tonight’s work a week from this Friday), accrued wages and taxes will also automatically increase.


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