Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Types of Receivables

Financial Accounting

7. Receivables and Investments

Types of Receivables

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Multiple Choice

Why would a company sell its receivables to another company?

To quickly generate cash and improve liquidity

To increase the total amount of receivables on its balance sheet

To avoid recognizing revenue from sales

To reduce its inventory levels

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Verified step by step guidance

Understand the concept of 'selling receivables': Selling receivables, also known as factoring, is a financial transaction where a company sells its accounts receivable (money owed by customers) to another company, typically a factoring company, at a discount.

Identify the primary reason for selling receivables: Companies often sell receivables to quickly generate cash. This is particularly useful for improving liquidity, which refers to the ability of a company to meet its short-term financial obligations.

Evaluate the incorrect options: Selling receivables does not increase the total amount of receivables on the balance sheet; instead, it removes them from the company's books. It also does not help avoid recognizing revenue from sales, as revenue is recognized when the sale occurs, not when receivables are sold. Lastly, selling receivables does not directly reduce inventory levels, as inventory is unrelated to accounts receivable.

Connect the correct answer to financial strategy: By selling receivables, a company can convert outstanding invoices into immediate cash, which can be used for operational needs, debt repayment, or other financial priorities. This is a common strategy for companies facing cash flow challenges.

Summarize the rationale: The correct answer is 'To quickly generate cash and improve liquidity,' as selling receivables provides immediate funds and enhances the company's ability to manage its short-term financial obligations.