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Receivable Financing Concepts
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Receivable Financing Concepts

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Questions and Answers

Which type of costs are excluded from the cost of inventories?

  • Storage costs for goods in process
  • Abnormal amounts of wasted materials (correct)
  • Costs for designing products for specific customers
  • Costs directly engaged in providing the service

    • What is included in the cost of inventories for a service provider?

  • Costs incurred in advertising services
  • Sales and general administrative personnel
  • Distribution costs related to service delivery
  • Labor costs of personnel directly engaged in providing the service (correct)

    • Which of the following is true regarding storage costs?

  • Storage costs are always recognized as expenses
  • Storage costs on goods in process are capitalized (correct)
  • All storage costs are capitalized as part of inventories
  • Storage costs on finished goods can be capitalized

    • Which of the following costs would NOT be included in inventories?

    <p>Administrative overheads that do not contribute to inventory preparation</p> Signup and view all the answers

    How are costs associated with sales and general administrative personnel treated?

    <p>Not included and recognized as expense when incurred</p> Signup and view all the answers

    What characterizes assignment as opposed to pledging of accounts receivable?

    <p>Assignment is a more formal type of pledging.</p> Signup and view all the answers

    In which type of assignment do customers continue making payments to the assignor?

    <p>Non-notification assignment</p> Signup and view all the answers

    What is typically charged by the assignee for the assignment agreement?

    <p>All of the above</p> Signup and view all the answers

    How does factoring differ from assignment regarding ownership of accounts receivable?

    <p>Assignment retains ownership with the assignor.</p> Signup and view all the answers

    What must the customers do when their accounts are factored?

    <p>Pay directly to the factor.</p> Signup and view all the answers

    What type of arrangement is factoring classified as?

    <p>Without recourse, notification basis</p> Signup and view all the answers

    What happens in factoring regarding gains or losses?

    <p>A gain or loss is recognized for the difference between the proceeds and the net carrying amount.</p> Signup and view all the answers

    What is the typical percentage of face value that the assignee may lend against assigned accounts?

    <p>70% to 90%</p> Signup and view all the answers

    What is the primary difference in credit risk between collateralized and noncollateralized liabilities?

    <p>Credit risk is lower for collateralized liabilities.</p> Signup and view all the answers

    Which form of receivable financing requires the borrowing entity to make collections but may involve turning them over to the bank?

    <p>Pledge of accounts receivable</p> Signup and view all the answers

    In which situation might an entity seek to finance its receivables?

    <p>During a general business decline with delayed collections.</p> Signup and view all the answers

    Which of the following best describes the process of assigning accounts receivable?

    <p>The rights to certain accounts receivable are transferred to a lender.</p> Signup and view all the answers

    What is typically charged by the factor for its services in a factoring arrangement?

    <p>A commission or factoring fee of 5% to 20%</p> Signup and view all the answers

    What does the factor's holdback represent in a factoring agreement?

    <p>A receivable from the factor and classified as a current asset</p> Signup and view all the answers

    What is one key aspect of accounting for a pledged account receivable loan?

    <p>No accounting entry for the pledged accounts is needed.</p> Signup and view all the answers

    What is a common outcome of delayed collections on accounts receivable?

    <p>Potential financial distress.</p> Signup and view all the answers

    Who is considered the liable party in a promissory note?

    <p>Maker</p> Signup and view all the answers

    Which method of receivable financing allows for gaining cash by assigning receivables to a lender?

    <p>Factoring</p> Signup and view all the answers

    What role does an endorser play in the discounting of a note receivable?

    <p>They transfer rights to the endorsee by signing the note</p> Signup and view all the answers

    What is secondary liability in the context of endorsement?

    <p>Liability to pay the endorsee if the maker dishonors the note</p> Signup and view all the answers

    Which of the following statements about receivable financing is correct?

    <p>It allows for immediate cash flow management.</p> Signup and view all the answers

    What does the term 'with recourse' indicate in an endorsement?

    <p>The endorser must pay if the note is dishonored</p> Signup and view all the answers

    What is the main purpose of factoring accounts receivable?

    <p>To obtain needed cash quickly</p> Signup and view all the answers

    What occurs before merchandise is shipped to a customer in a continuous factoring arrangement?

    <p>The factor approves the customer's credit</p> Signup and view all the answers

    Which items should be included in the inventory according to the legal test?

    <p>Goods held on consignment</p> Signup and view all the answers

    Under FOB destination terms, when does ownership of goods transfer?

    <p>Upon receipt of the goods by the buyer</p> Signup and view all the answers

    Which situation indicates that the goods sold on installment are still the property of the seller?

    <p>When the selling price is fully collected</p> Signup and view all the answers

    In the case of goods purchased FOB shipping point, who is responsible for freight charges?

    <p>The buyer from the point of shipment</p> Signup and view all the answers

    What happens to goods in transit sold under FOB destination terms?

    <p>They remain the seller's property until delivered</p> Signup and view all the answers

    If an entity does not have the title to goods, how should these goods be treated?

    <p>They should be excluded from the inventory</p> Signup and view all the answers

    What does the term 'passing of title' refer to?

    <p>The point in time when ownership changes</p> Signup and view all the answers

    Which of the following goods would normally be excluded from an entity's inventory?

    <p>Goods sold but not yet shipped</p> Signup and view all the answers

    Study Notes

    Receivable Financing

    • Receivable financing is the ability of a company to raise money by using its receivables.
    • This is especially useful during economic downturns when sales decrease and customers pay slowly.

    Forms of Receivable Financing

    • Pledge of accounts receivable: This is a loan secured by accounts receivable, but the company still collects payments and uses them for debt repayment.
    • Assignment of accounts receivable: This is a formal type of pledge where the borrower (assignor) transfers rights to specific accounts receivable to a lender (assignee) in exchange for a loan.
      • This is secured by a financing agreement and promissory note.
      • Assignments can be done with or without notification to the customer.
    • Factoring: This involves outright selling of accounts receivable to a financial institution called a factor, who assumes credit and collection responsibility.
      • The factor might charge a commission (5% - 20%) for these services.
      • There are two types: casual factoring, which is used when a company needs immediate cash, and factoring as a continuing agreement, where the factor purchases all of the seller's receivables and assumes credit approval.
      • The factor might withhold a portion of the proceeds as a "factor's holdback" for potential customer returns and allowances.

    Discounting of Notes Receivable

    • Discounting: When a company needs cash before the maturity date of a promissory note, they can sell it to a bank or financial institution called a discounter for a discounted amount.
    • Endorsement: This is the transfer of right to a negotiable instrument, typically by signing the back of the note.
      • This can be done "with recourse," meaning the seller becomes liable for payment if the buyer defaults. This is called secondary liability in legal terms and contingent liability in accounting.

    Inventory Valuation

    • Ownership: Inventory must belong to the company to be included in its inventory, regardless of location.
    • FOB (Free on Board): The FOB term in a sales contract determines ownership during transit.
      • FOB destination: The buyer owns the goods upon arrival at their destination, and the seller is responsible for freight charges until delivery.
      • FOB shipping point: The buyer owns the goods once they are shipped, and is responsible for freight charges from the shipping point.
    • Other costs: Only costs incurred to bring inventory to its current location and condition are included in the inventory valuation.
      • Costs excluded from inventory valuation and expensed instead:
        • Abnormal waste
        • Storage costs (except for goods in process)
        • Administrative overhead not directly related to inventory
        • Distribution or selling costs.
    • Service providers: For a service provider, inventory costs are mainly labor and other personnel costs directly involved in providing the service.
      • Sales and general administrative personnel costs are expensed.

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    Description

    This quiz covers essential concepts of receivable financing, focusing on its importance for businesses, especially during economic downturns. It includes different forms such as pledges, assignments, and factoring, highlighting their mechanisms and implications.

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