CFA Practice Question
Sales of receivables should be adjusted as follows
A. both cash and current liabilities should be increased by the amount of receivables sold.
B. cash should be decreased and current liabilities should be increased by the amount of receivables sold.
C. the increase in uncollected receivables should be classified as cash from operations.
Explanation: Sales of receivables are effectively collateralized borrowings with the receivables serving as collateral.
User Contributed Comments 7
| User | Comment |
|---|---|
| dimanyc | I think cash should be decreased as since this is a "collateralized borrowing", we received extra cash for it, which we now need to reduce. No? |
| humphrey | cash should be increased conmensurate to increase in liability. |
| uviolet | when you borrow, cash comes in. so it increases cash position. the receivables is only a collateral. |
| carreca | I thought "sale of receivables" was an operation to improve current ratio and therefore, majority of liabilities would be classified as LT liabilities.... I understand the increase of liabilities in this case but in real life, would it be the same? |
| cslau83 | But if it is treated as collaterized borrowing, it means that it is assumed that seller still bears the risk of default of customers. That isn't entirely right isn't it? But if the analyst' intention is to evaluate the company as a going concern under normal conditions, then B should be the right answer shouldn't it? |
| ninad123 | While Adjusting, we add back Account Receivables, and equal liability to Balancesheet. If Sales>AR then that amount we add to EBIT and remove depreciation, Cash is completly removed from balancesheet. |
| manju79 | The question is not clear as most sales of receivables happen without the contingent liability accounted for? |