Product Financing Arrangement

D

The key to product financing is that the purchaser retains very little of the risk because typically whatever does not sell, the seller agrees to buy back at a specified price.

A product financing arrangement refers to a specific type of transaction where a party transfers ownership of inventory to a purchaser while retaining the inventory in their own warehouse. The correct answer to the question is option B.

Let's go through each answer choice to understand why option B is the correct choice:

A. The party who manufactures the inventory giving extended terms to certain preferred customers does not necessarily constitute a product financing arrangement. It could simply be a form of offering favorable payment terms to specific customers. This arrangement does not involve the transfer of ownership of inventory while retaining it in the manufacturer's warehouse.

B. Option B correctly identifies a product financing arrangement. In this scenario, the ownership of the inventory is transferred to a purchaser, but the inventory is physically kept in the seller's warehouse. This means that while the purchaser technically owns the inventory, they do not take physical possession of it immediately. Instead, the seller holds the inventory on behalf of the purchaser.

C. This answer states that all the answers would be accounted for as product financing arrangements. However, this is not accurate. Only the specific scenario described in option B constitutes a product financing arrangement. The other options do not meet the criteria.

D. Option D describes a different type of transaction known as a repurchase agreement, which is not the same as a product financing arrangement. In a repurchase agreement, a party transfers ownership of inventory to a purchaser, but they also agree to repurchase the product at a specified price over a specified time. This type of arrangement is typically used as a short-term financing mechanism. While it involves a transfer of ownership and repurchase, it does not include the element of the seller retaining the inventory in their own warehouse, as stated in option B.

To summarize, a product financing arrangement occurs when ownership of inventory is transferred to a purchaser, but the inventory is retained in the seller's warehouse. Option B accurately describes this arrangement, making it the correct choice.