Why would a business factor its accounts receivables?
A - HSC - SSCE Business Studies - Question 13 - 2017 - Paper 1
Question 13
Why would a business factor its accounts receivables?
A. To improve cash flow
B. To increase owner’s equity
C. To increase the value of current assets
D. To improve ... show full transcript
Worked Solution & Example Answer:Why would a business factor its accounts receivables?
A - HSC - SSCE Business Studies - Question 13 - 2017 - Paper 1
Step 1
A. To improve cash flow
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Answer
Factoring accounts receivables allows a business to convert outstanding invoices into immediate cash, thereby improving its cash flow. This can be crucial for maintaining operations, fulfilling obligations, or investing in new opportunities.
Step 2
B. To increase owner’s equity
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Answer
While factoring can enhance cash flow, it does not directly increase owner’s equity. Owner’s equity is affected by profits retained in the business or additional capital contributions, not merely by leveraging accounts receivables.
Step 3
C. To increase the value of current assets
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Factoring does not necessarily increase the value of current assets. Instead, it transforms receivables into cash, which can alter the composition of current assets but doesn't increase their overall value.
Step 4
D. To improve the value of the business
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Answer
By improving cash flow, a business can theoretically enhance its overall value. However, this effect is indirect and contingent upon how the generated cash is utilized.
