A Firm May Use Its Accounts Receivable as Collateral for a Loan

question 118

Multiple Choice

A firm may use its accounts receivable as collateral for a loan from a bank or other financial institution.Which of the following is/are true?

• A)The firm physically maintains control of the accounts receivable, collects cash from customers, and repays the loan.
• B)If the firm fails to repay the loan, the lender can claim the receivables.
• C)If the firm has used its accounts receivable as collateral for a loan, the firm will continue to show those receivables as an asset (and there will also be a loan payable liability).
• D)The firm should disclose the lending arrangement in its financial reports.
• E)all of the above

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Definitions:

Net Cash Flows

The variance between the amount of money entering and leaving a business over a set timeframe.

Desired Rate

Typically refers to an interest rate or return rate that an investor or entity aims to achieve on an investment or project.

Capital Investment

Funds invested in a firm or enterprise for the purpose of furthering its business objectives, including acquiring fixed assets.

Net Present Value

Net present value is a financial metric that calculates the difference between the present value of cash inflows and outflows over a period of time, used to assess the profitability of investments.