Luminox Industries is a defense contractor with annual sales of $100 billion. Luminox is an aggressive user of "purchasing cards" to pay for maintenance supplies, office supplies, shop supplies, services, and some inventory items. Purchasing cards, technically, are "charge" cards. In other words, purchasing card payments made by Luminox are due in full to the card issuer (Bank of America) 10 days after the end of the billing cycle (the 28th of each month). There is no interest rate associated with the purchasing card agreement. Luminox's annual spending on purchasing cards is $2.4 billion (or $200 million per month).

Luminox uses the purchasing card because, unlike check payment, it receives 1.5% cash back from their card issuer on all of its purchases. By contrast, the supplier paid with purchasing cards receives about 97% of the purchase price in 1 to 3 days after the card is charged. On average, the use of the purchasing card does not change the final due date of the purchase for Luminox. On December 31 (the fiscal year end), Luminox owes $200 million to the Bank of America for its purchases with its purchasing cards. Because some financiers remove non-interest bearing liabilities from the "debt to equity" ratio, the CFO at Luminox has categorized the amount due to the Bank of America as a component of "Accounts Payable." The CFO argues that the terms of the card purchases are the same as the terms of any other supplier (net amount due at date certain with no interest), this is the correct treatment.

1. As the auditor of Luminox, should the $200 million liability to the Bank of America be categorized in "Accounts Payable" or should it be a "Short Term Debt Payable"? Provide appropriate support from GAAP or other research for your position.

 2. Does it make a difference whether the $200 million is categorized as a "trade payable" or "short-term debt"? If so, explain why it matters.