pg 331 schweser # 21 An analyst discovers that although the firm he is analyzing has reported a sale of receivables as an actual sale for cash, the receivables buyer has the right to have any receivables that are not paid on time replaced with other receivables. The firm’s quick ratio without any adjustments to the financial statements is 1.3. The effects of treating the borrowing against receivables as a sale are least likely to include: A decreasing the receivables turnover ratio B reducing the value of cash and marketable securities C decreasing the current ratio D increasing the total debt ratio I am losing it. why would the sold receivables be added back?
The receivables are added back because this is essentially a collateralized loan, with the receivables serving as collateral, since the buyer has the right to claim his money for any uncollected receivables. This is discussed in Leases & OBS. Adjustment for sale of receivables w/ recourse will increase AR. Receivables turnover ratio = SALES/AR denominator goes up -> answer is A