Disposing of Accounts Receivable

Lesson: Disposing of Accounts Receivable

In this lesson, explore various strategies for managing accounts receivable when direct collection isn't possible. Nick Palazzolo, CPA, breaks down the concepts of secured borrowing and the sale of receivables, helping to understand how businesses can efficiently manage their working capital by either using receivables as collateral to secure a low-interest loan or by selling them to a third party. He walks through the benefits and risks associated with each method, from maintaining ownership and control in secured borrowing to transferring the risks and rewards through the sale of receivables to a factor. The dynamics of these transactions are dissected to ensure a thorough grasp of how they can be used to manage short-term assets and liabilities, making it a vital toolbox for maintaining the financial health of a business. In addition, Nick demonstrates the concepts with a practical example that brings the financial mathematics of these operations to life, highlighting the cost-benefit considerations that companies must evaluate.

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Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Let's talk a little bit about disposing of accounts receivable and notes receivable. And what does disposing of them mean? Well, ideally, in a perfect world, you would dispose of them by just collecting on them, right? You would just collect your cash that is owed to you. But that's not always the case.

Now this chart, this isn't necessarily something you need to know super well. It's something I actually cover in FAR as well. But it does come up on this exam. Just like if you're trying to understand another language, you're not going to get the full picture if you don't understand what these are. Are you going to get direct questions on these?

It's possible, but I would just be more familiar with it as a whole. All right, so other than collecting on these receivables, right, I mean, again, ideally you would like to collect on them, but let's say you don't. You can either factor through secured borrowing or sell your receivables. This is both with third parties. Let's say it's your company.

This is your company and there's a third party. This is a company that literally does this. They do this for a living. They factor receivables and they buy receivables. What you could do is secure borrowing.

Let's say you have $100,000 of receivables. Well, since you're not getting cash from those right away, you want to manage your working capital, right? That's the goal here is to be efficient with your assets, minimize your liabilities. And what you could do is just like with a mortgage, if you don't pay it back, the bank takes your house and that's collateralizing. You're using an asset to get a cheaper loan, just like a home equity line of credit or refinancing.

So two, can you factor your

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