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CA Intermediate · Financial Management and Strategic Management · Management of Payables (Creditors)

Which of the following is a recognised disadvantage of relying heavily on stretching trade payables beyond the agreed credit period?

Stretching payables beyond agreed terms can harm the firm's credit reputation, causing suppliers to tighten credit, raise prices or withdraw discounts. It is not a permanent, costless source of funds, and it increases current liabilities, which lowers rather than raises the current ratio.

  1. AIt may damage the firm's credit standing and lead to loss of supplier goodwill or cash discountsCorrect
  2. BIt always raises the firm's current ratio sharply
  3. CIt eliminates the need for working capital financing permanently
  4. DIt reduces the firm's cost of goods purchased automatically

Explanation

Stretching payables is a form of spontaneous financing, but delaying beyond terms can harm the firm's credit rating, cause suppliers to refuse credit or charge higher prices, and forfeit discounts. It does not automatically cut purchase cost or permanently remove financing needs, and higher payables actually lower the current ratio.

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