SS 9 LOS 40 part C Can someone help explain the part where they talk about the sale of receivables (with recourse) and how that adjust EBIT. I “think”, lol, i get the part where the receivables are adjusted to the Debt, and thus increase your Debt-Equity ratio…because u are liable for any inability to collect, and thus have to add the full amount of the recievable u sold, on the theory that it’s possible the buyer is unable to collect ANY of it and u’d have to give them the full payment back… However, i’m a little lost with why the EBIT increases? The schweser book shows an example that the Interest expense is added to the Reported EBIT. I don’t understand this. Is it because, the company buying the receivables pays you a discount of what they are worth, and that “haircut” off what they are worth (let’s say 5%), is categorized as an implied interest payment, which u need to adjust back into the Reported EBIT? i guess i’m hoping someone can explain this in a little more plain english example then the book. Thnx- Ash
ASH, what you said here Is it because, the company buying the receivables pays you a discount of what they are worth, and that “haircut” off what they are worth (let’s say 5%), is categorized as an implied interest payment, which u need to adjust back into the Reported EBIT seems correct to me
This was in another thread but here is an example you have $10 AR, you sell it with recourse for $8 for analysis purposes, you must add the $8 back into assets and debt, as well as $2 for the interest exspense.
yeah i saw ur example in the other thread…but left me just as confused… i think the EBIT it adjusted upward, because if they had NOT done the sale, then that “haircut” would never have happened, and thus u’re EBIT would be higher, no?