Question

Which of the following is a method used to generate cash from accounts receivable?

1) Factoring
2) Depreciation
3) Amortization
4) Accrual

Answer 1

Factoring is a financial transaction where a business sells its accounts receivable to a factor at a discount to obtain immediate cash, which is different from depreciation, amortization, and accrual that are accounting methods.

Step-by-step explanation:

The method used to generate cash from accounts receivable is factoring. Factoring involves a business selling its accounts receivable to a third party (a factor) at a discount, in order to obtain immediate cash. It is a financial transaction where the factor assumes the risk of bad debt and the responsibility for collecting the receivables, providing the business with quick capital. This method contrasts with options like depreciation, amortization, and accrual, which are accounting methods used for spreading the cost of an asset over its useful life, reducing debt over time, and recording revenues and expenses when they occur, respectively.