Question 1

What are the two main methods for disposing of accounts receivable?

Accepted Answer

Accounts receivable can be disposed of through factoring or writing off as bad debt. Factoring involves selling receivables to a third party at a discount for immediate cash. Writing off occurs when collection is unlikely, such as after customer bankruptcy, and the amount is removed from the books as an expense.

Question 2

How does factoring improve a company's cash flow?

Accepted Answer

Factoring provides immediate cash by selling receivables to a factor, who keeps a portion as a fee. Although the company receives less than the full amount owed, the immediate liquidity improves cash flow, which may be critical for operations and working capital management.

Question 3

Why would a company write off a receivable as bad debt?

Accepted Answer

A company writes off a receivable as bad debt when collection is unlikely, such as when a customer declares bankruptcy. This removes the amount from accounts receivable and records it as an expense, ensuring the company's reported assets are not overstated and financial statements remain accurate.

Question 4

What is the difference between factoring with and without recourse?

Accepted Answer

Factoring with recourse means the original seller retains collection risk if the customer fails to pay. Without recourse, the factor assumes all collection risk. The choice depends on the company's risk tolerance and the terms negotiated with the factoring company.

Question 5

How does disposing of accounts receivable affect financial reporting?

Accepted Answer

Disposing of accounts receivable reduces the receivables balance on the balance sheet and ensures accurate financial reporting. Factoring generates immediate cash, while writing off bad debt records a loss as an expense. Both methods remove uncollectible amounts from assets to prevent overstating the company's financial position.

Question 6

What factors should a company consider when choosing between factoring and write-off?

Accepted Answer

Companies should evaluate cash needs, credit policies, and the likelihood of recovering the owed amount when deciding between these methods. Factoring suits situations requiring immediate liquidity despite the discount fee. Write-off is appropriate when recovery is virtually impossible, such as after customer bankruptcy or extended non-payment.

Disposing of Accounts Receivable

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