A company sells its recievables but retains the risk associated with bad debts. When reviewing this co. a fin. analyst would adjust the co’s. D/E ratio and its A/R turnover ratio. A. Up UP B. Dwn UP C Up Dwn D Dwn Dwn
Receivables would be increased. So Sales / AR = AR Turnover would reduce. Since the risk associated with Bad debts is retained, analyst would adjust debt upwards. So D/E would increase. UP DOWN --> Choice C Is that right?
if it sold the receivables and held the risk, then they are essentially moving the receivable to debt. A/R goes down and debt goes up. Sales/AR will go up and D/E will also go up. Since Sales and equity stay same. Hence A
Nice C it is.
cpk123 Wrote: ------------------------------------------------------- > Receivables would be increased. So Sales / AR = AR > Turnover would reduce. > Since the risk associated with Bad debts is > retained, analyst would adjust debt upwards. So > D/E would increase. > > UP DOWN --> Choice C > > Is that right? why would receivables increase?
that is what an analyst would do. The company sold receivables - but retained the risk of bad debt. So an analyst would adjust that by adding back the sold receivables to the receivables account, as though it was not sold at all.