What is the impact of using long term liabilities to meet short term needs?

Solutions

Expert Solution

Long-Term Liabilities

Long-term liabilities are generally meant for expansion projects, research and developmental activities, etc. These borrowings consume larger processing time for sanction and involve high processing fees.

If short-term needs are met through long-term liabilities, it shows the following impact-
1. Poor working capital management by the company. The company is unable to fulfill its short-term obligations from its operating activities. The reasons could be high collection period for receivables, less inventory turnover ratio, etc.

2. High leverage and financial risk- There is a high possibility of becoming debt burden, since the source for the operational activities are long-term borrowings. The debt-equity ratio will also be high. If the company doesnot improve its working capital, then there may be erosion of equity.

3. Time and Processing cost involved- The long-term liabilities can not be obtained as steadily as the short-term liabilities. Hence, for immediate cash requirements, dependence on long-term liabilities are not worthwile.

ekkarill92 answered 1 year ago

Next > < Previous

Related Solutions

What are the characteristics of short-term and long-term liabilities? What are some examples of each that...

What are the characteristics of short-term and long-term liabilities? What are some examples of each that you own? How do businesses account for at least two long-term liabilities?

What are contingent liabilities, and how do they differ from other short- or long-term liabilities? Which...

What are contingent liabilities, and how do they differ from other short- or long-term liabilities? Which types of contingent liabilities need to be disclosed, and where do they appear in the financial statements. Give examples of all three types of contingencies.

What impact (short term and long term) did the roman conquest have on Britain?

Liabilities can be listed as both long-term and short-term, based on the time frame for paying...

Liabilities can be listed as both long-term and short-term, based on the time frame for paying them. You have a notes payable which was issued to purchase inventory and it was issued on 10/15 and is for 90 days. Determine how to report this on balance sheet and support your reason for this reporting. The company knows they cannot pay this note in 90 days and is working to convert it to be payable over 15 months. Does this change...

Distinguish between Current/Short term Liabilities and Non-current/Long term Liabilities. Illustrate your answer with journal entries as...

Distinguish between Current/Short term Liabilities and Non-current/Long term Liabilities. Illustrate your answer with journal entries as examples.

identify the key issues of Falling Oil Prices in their Long-term and Short-term Impact on the...

identify the key issues of Falling Oil Prices in their Long-term and Short-term Impact on the Ordinary Investor

A manager needs to hire short-term employees to meet production demands. The manager would like to...

A manager needs to hire short-term employees to meet production demands. The manager would like to hire one of three possible short-term workers. Ten hours are demanded with 50% probability, 20 hours are demanded with 30% probability, and 30 hours are demanded with 20% probability. The table below represents the alternatives and possible states of nature. States of Nature (Worker hours demanded) Alternatives 10 hr total pay 20 hr total pay 30 hr total pay Worker 1 $1,000 $1,800 $2,400...

Question