Principles of Managerial Finance, 15th Edition

16.1 Spontaneous Liabilities

1. LG1

2. LG2

Spontaneous liabilities arise from the normal course of business. For example, when a retailer orders goods for inventory, the manufacturer of those goods usually does not demand immediate payment but instead extends a short-term loan to the retailer that appears on the retailer’s balance sheet under accounts payable. The more goods the retailer orders, the greater will be the accounts payable balance. Also in response to increasing sales, the firm’s accruals increase as wages and taxes rise because of greater labor requirements and the higher taxes on the firm’s increased earnings. No explicit cost is normally attached to either of these current liabilities (i.e., they do not bear interest), although ...