Certified Management Accountant 2025 – 400 Free Practice Questions to Pass the Exam

Factoring receivables involves the selling of accounts receivable to a third party (the factor) at a discount in exchange for immediate cash. This process can be structured either with recourse or without recourse. When factoring is done with recourse, the seller remains liable if the receivables are not collected. This means that if a customer fails to pay their invoice, the original seller (the business that factored the receivables) must reimburse the factor for those uncollectible accounts. This characteristic of recourse factoring impacts the risk profile and financial liability of the selling company, making it a critical aspect of understanding the nature of this financing approach.

In contrast, options that suggest it always needs to be recorded on the balance sheet, eliminates the need for cash flow management, or cannot be utilized for off-balance-sheet financing do not accurately reflect the broad ways in which factoring arrangements can be structured or the nature of cash flow management in a business. Factoring does not inherently eliminate the need for ongoing cash flow management; rather, it is often a tool used to manage cash flow challenges. Furthermore, off-balance-sheet financing can indeed involve receivables, depending on how the arrangement is structured. Thus, the option highlighting the role