When a business factors its accounts receivables, this means that the business _

Question

When a business factors its accounts receivables, this means that the business ________.

A) uses the receivables as security for a loan

B) no longer has to deal with the collection of the receivables from the customers

C) receives the total amount of the receivables from the factor

D) receives cash, less an applicable fee, after the factor collects from the customers

The credit department must have access to cash so that they can exercise effective internal control over receivables.      TRUE                  FALSE       

Explanation / Answer

1) When a business factors its accounts receivables, this means that the business :

B) no longer has to deal with the collection of the receivables from the customers.

Now the Factor has the legal rights to collect the amount from the accounts Receivable at the time of maturity. The factor earns discount from this arrangement and the business gets immediate cash.

2) The credit department must have access to cash so that they can exercise effective internal control over receivables.

False

Credit department make decisions concerning credit limits, acceptable levels of risk and terms of payment to their customers. They do not require any access to cash to exercise effective internal control over receivables.

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