If a company adopts an accounts receivable factoring program and accounts for the factoring as a sale of receivables, which of the following is true when the company starts the program (assuming all else is equal)?A. The factoring arrangement must be with a consolidated entity to qualify for sale accounting.B. The accounts receivable balance will decrease.C. Cash flow from operations may increase.D. A retroactive restatement is not necessary due to a change in accounting principle.
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A. The factoring arrangement must be with a consolidated entity to qualify for sale accounting. This statement is not necessarily true. The qualification for sale accounting might depend on various factors, including the terms of the factoring arrangement and whether the transfer of receivables meets the criteria outlined in accounting standards, such as transferring the risks and rewards of ownership.
B. The accounts receivable balance will decrease. Since the company is selling its receivables, they are removed from the balance sheet as they are no longer considered the company's assets.
C. Cash flow from operations may increase. This is likely because when a company factors its accounts receivable, it receives immediate cash from a financial institution or factor, which increases its cash position. This cash received is often more immediate than waiting for customers to pay their outstanding invoices, positively impacting cash flow from operations.
D. A retroactive restatement is not necessary due to a change in accounting principle. Generally, if the company starts a factoring program and accounts for it as a sale of receivables, this represents a change in accounting principle. In such cases, a retroactive restatement or disclosure might be necessary to ensure accurate and comparable financial reporting.
Therefore, the most directly applicable statement to the company starting the factoring program would be C. Cash flow from operations may increase.