Q7RQ - Horngren'S Financial And Managerial Accounting

Question

What occurs when a business factors its receivables?

Step-by-Step Solution

Answer

It sells its receivables to a finance company or bank.

Step 1: Meaning of Receivables

Receivables are any assets that result from a company's core operations and any assets that reflect cash that needs to be collected from outside parties that owe the company money.

Step 2: Event when a business factors its receivables

When a corporation factors its receivables, it sells those receivables to a bank or financial institution (often called a factor). The factor pays the business cash in exchange for the receivables, less relevant fees. The cash on the receivables is now collected by the factor rather than the company. The management of recordkeeping and receivables is no longer the company’s responsibility.