A company that factors its receivables will have a less favorable receivable turnover than a company that does not factor.

Question

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Factoring receivables involves selling accounts receivables at a discounted rate to a third party, which lowers the recorded receivables on the company's balance sheet. As a result, the denominator in the receivables turnover ratio decreases, making the ratio appear more favorable. However, since factoring receivables results in a loss of revenue and profit, it is not necessarily a better practice than not factoring receivables.

A Company That Factors Its Receivables Will Have a Less