[AMERICANDREAM]

Which one of the following provides a spontaneous source of financing for a firm?

a. AP
b. AR
c. Preferred stock
d. Debentures

a is correct. Explanations state that AR takes time to factor and PS and debentures take time to issue. But my question is how is AP a source of financing? Isn’t it a cash outflow?

[CPA so close, so far away]

No. Its not a cash outflow. A creation of accounts payable means that we OWE a company money, but we are not paying them right. Therefore, we can hold onto our cash longer.

For example, if I own a business and I go to Best Buy and purchase a computer on credit, I am able to take the cash that I didn't have to pay right now (because I used credit) and invest those funds. That's why collecting AR fast and paying AP slow is a good cash management technique.

[CPA so close, so far away]

*not paying them right now.

Sorry for the typo.

[Author]

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