Question

Tidewater Distributors is successfully using short-term financing to buy inventory for resale. As sales climb, the managers realize that they must decide what to do with the money. Since you are the financial manager, they ask for your advice. You advise them to firstA) repay the short-term obligations out of the sales revenue.
B) use the money to buy a yacht for the managers.
C) increase all employees' wages.
D) enroll all the salespeople in a sales training course.
E) borrow more money.

Answer 1

Answer:

A) repay the short-term obligations out of the sales revenue.

Explanation:

Tidewater should use their profits to try to lower their total debts, specially short term obligations. The problem with short term obligations is that the company continuously needs an inflow of cash to repay them.

It is not something unusual for retailers to take 1-3 month credits to purchase and resell merchandise, but they always have the risk of not being able to sell enough merchandise one month to cover their costs and their debt payments.

Long term debt is always more manageable since you have more than a year to pay them back and the interest rates are usually lower.

Answer 2

Answer:

A)

Explanation:

Based on the information provided within the question it can be said that I would advise them to first repay the short-term obligations out of the sales revenue. This is because debt needs to be always be payed first as it allows you to use the rest of the money as pure profit and prevents unexpected problems later on.