Financial Accounting and Reporting-CPA Practice Exam

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Prepare for the Financial Accounting and Reporting CPA Exam. Study with multiple choice questions and detailed explanations. Boost your knowledge and excel in your exam!

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A company factors its receivables without recourse. What does this imply?

The company retains all credit risk
The company transfers all credit risk to the factor
The company is liable for uncollectible accounts
The company must buy back uncollectible accounts

The correct answer is: The company transfers all credit risk to the factor

When a company factors its receivables without recourse, it means that the risk of uncollectible accounts is fully transferred to the factor, which is the financial institution or entity purchasing the receivables. This arrangement implies that once the receivables are sold to the factor, the company does not retain any liability for the collection of those accounts. In a without-recourse factoring agreement, if the customer fails to pay the receivable, the factor absorbs the loss and cannot seek reimbursement from the original company. Thus, the company is free from any credit risk associated with those receivables after the transaction. This differs significantly from factoring with recourse, where the company would still hold some responsibility for the uncollectibility of the accounts it sold. The other options do not align with the nature of a without-recourse arrangement, as it explicitly indicates a transfer of risk rather than retaining it.