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Q. In order to improve management of recievables, PKA co is considering using a debt factor on with recourse basis. Which of the following are benefits of with recourse factoring for PKA?
a) fall in bad debts
b) reduction in account receivable staffing cost
c) improvement in short term liquidityCorrect ans is b and c. But why “a” cannot be the correct answer. It too seems to be correct?
Because it is ‘with recourse’, the company will still suffer any bad debts.
But sir isn’t the answer of this mcq contradicting with d13 plot co question in which examiner has written that
Factoring can assist in the management of trade receivables through the expertise offered by the factoring company. This may lead to a REDUCTION IN BAD DEBTS, a decrease in the level of trade receivables, a decrease in the amount of managerial time devoted to chasing slow payers, and taking advantage of early settlement discounts from trade suppliers due to the availability of cash from trade receivables.
As the examiner wrote (and yet again as I say in my lectures!!!) – using a factor MAY result in a reduction in irrecoverable debts. Therefore it might be a benefit, but it is not guaranteed to be a benefit.
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