What is the difference between short-term debt and long-term debt? Describe in detail how debt relates...

What is the difference between short-term debt and long-term debt? Describe in detail how debt relates to financial management

Expert Solution

Short-term debt is debt that has a maturity of less than 1 year. This is shown under "current liabilities" portion of the balance sheet. This included accounts payable, notes payable, bank overdraft etc.

Long-term debt is debt that has a maturity of more than 1 year. This is shown under "long-term debt" portion of the balance sheet. This included bonds, mortgage loans, term loans etc.

Debt relates to financial management in this way :

Short-term debt is a component of working capital. Efficient management of working capital is a key part of financial management. Short-term debt should be used for short-term assets / expenses such as operating expenses and current liabilities. A high ratio of short-term debt can make the liquidity position bad.
Long-term debt is a source of capital, along with equity and preferred stock. Long-term debt should be used to fund long-term assets. A high proportion of long-term debt in the capital structure increases financial risk due to higher financial leverage. Financial managers need to target the optimal level of debt to balance financial risk and cheap source of capital

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