Question

Red Co. had $3 million in accounts receivable recorded on its books. Red wanted to convert the $3 million in receivables to cash in a more timely manner than waiting the 45 days for payment as indicated on its invoices. Which of the following would alter the timing of Red's cash flows for the $3 million in receivables already recorded on its books?
A. Change the due date of the invoice.
B. Factor the receivables outstanding.
C. Discount the receivables outstanding.
D. Demand payment from customers before the due date

Answer 1

Answer:

B) Factor the receivables outstanding.

Explanation:

Red can sell its accounts receivable to a factoring company. A factoring company buys accounts receivables and then collects them. Of course the price that they pay for the accounts receivable includes a certain discount on the total amount. If Red sells its accounts receivables it must report the factoring expense which reduces the total amount collected of accounts receivables.