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ACCA Applied Skills · Financial Management · Management of inventories, accounts receivable, accounts payable and cash

Which of the following is a likely consequence for a company that consistently stretches payments to suppliers well beyond agreed credit terms?

Persistently paying beyond agreed terms risks damaging supplier relationships, so suppliers may withdraw credit, demand earlier payment, raise prices or refuse supply. Short-term cash is saved but at the cost of reliability and goodwill.

  1. AA lower cost of purchases because suppliers reward long credit periods
  2. BDamage to supplier relationships and possible loss of credit or goodwillCorrect
  3. CAn improvement in the current ratio because payables increase and are shown as non-current
  4. DAn automatic reduction in the company's overtrading risk

Explanation

Late payment can lead suppliers to withdraw credit, demand cash on delivery, raise prices or give priority to other customers. Higher payables do not improve the current ratio as they are current liabilities, and stretching payables is typically a sign of overtrading pressure rather than a cure.

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