Short Costs Homework Help

Short Costs

Another general factor to be considered in determining cash needs is the cost associated with a shortfall in the cash needs. The cash forecast presented in the cash budget would reveal periods of cash shortages. In addition, there may be some unexpected shortfall. Every shortage of cashwhether expected or unexpected-involves a cost ‘depending upon the severity, duration and frequency of the shortfall and how the shortage is covered. Expenses incurred as a result of shortfall are called short costs Included in the short costs are the following: (i) Transaction costs associated with raising cash to tide over the shortage. This is usually the brokerage incurred in relation to the sale of some short-term near-cash assets such as marketable securities.

(ii) Borrowing costs associated with borrowing to cover the shortage. These include items such as interest on loan, commitment charges and other expenses relating to the loan.

(iii) loss of cash-discount, that is, a substantial loss because of a temporary’ shortage of cash.

(iv) Cost associated with deterioration of the credit rating which is reflected in higher bank charges on loans, stoppage of supplies, demands for cash payment, refusal to sell, loss of image and the attendant decline in sales and profits.

(v) Penalty rates by banks to meet a, shortfall in compensating balances.

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