You are the controller at ABC Corp. You have hired an intern to work with you over the summer. The intern is very ambitious and curious, and plans to obtain her CPA designation. When you arrive at your office on Tuesday morning the intern is waiting at the door with her notebook, and you know what this means—she has questions for you.

Required:

Adopt the role of the controller at ABC Corp. and provide answers to the following questions your intern has asked you. Be sure to answer clearly, concisely, and at a level of sophistication that your intern will understand.

1. Controller, thank you for letting me review some of the work the assistant controller does. I understand that accounts receivables can be transferred and may be recorded as either a borrowing or sale arrangement. The assistant controller showed me the journal entries that were recorded for the transfer of receivables to Remote Financing Corp. last month. I got to thinking about this, and I was wondering how the policy choice between recording as a borrowing versus sale affects cash flows.

2. The assistant controller told me that ABC Corp. has various bank accounts and holds foreign currencies such as U.S. dollars and Australian dollars because it sells products internationally and purchases from a number of suppliers who request U.S.- or Australian-dollar payment. The assistant controller showed me, on last year’s statement of earnings, the foreign exchange gain that resulted from the difference between the Canadian equivalent of receivables/payables and cash receipts/payments. I forgot to ask how this gain affects the statement of cash flows. I know ABC Corp. prepares a statement of cash flows using the indirect method. Would your answer be any different if ABC Corp. prepared a statement of cash flows using the direct method?

3. I am so confused about impairment of accounts receivable and how this affects the cash flows of ABC Corp. How is it possible that impairment reduces future cash flows from receivables?