FAC Accounts Receivable & Accounts Payable Management 3

Question 1

What distinguishes accounts receivable factoring from accounts receivable discounting?

Accepted Answer

Factoring involves selling receivables outright to a third party; discounting uses them as collateral for a loan

Answer

In factoring, the company sells its receivables to a factor who takes ownership and collection responsibility; in discounting, receivables are pledged as collateral while the company retains collection duties.

Question 2

Which internal control is most effective at preventing duplicate payments in accounts payable?

Accepted Answer

Stamping or marking invoices as 'PAID' immediately upon payment

Answer

Physically marking invoices as paid at the time of payment prevents the same invoice from being submitted and processed a second time.

Question 3

The approximate annualized cost of forgoing the discount under terms '2/10, net 30' is closest to:

Accepted Answer

37%

Answer

Using the formula (Discount % / (1 – Discount %)) × (365 / (Net Days – Discount Days)) = (0.02/0.98) × (365/20) ≈ 37.2%, making it very expensive to forgo the discount.

Question 4

When a company pledges its accounts receivable as collateral for a line of credit, this arrangement is called:

Accepted Answer

Assignment of receivables

Answer

Assignment of receivables involves using AR as collateral for borrowing while the company retains ownership and collection responsibility, unlike factoring where ownership is transferred.

Question 5

Under GAAP, the allowance for doubtful accounts is classified on the balance sheet as:

Accepted Answer

A contra-asset account that reduces gross accounts receivable

Answer

The allowance for doubtful accounts is a contra-asset that is subtracted from gross AR on the balance sheet to present the net realizable value of receivables.

(FAC) Finance and Accounting Certification Practice Test

(FAC) Finance and Accounting Certification Practice Test

FAC Accounts Receivable & Accounts Payable Management 3