Off B/S Financing - Sale of Receivables w/Recourse

CFA Level I
#1

Hi, With Off B/S Financing - Sale of Receivables w/Recourse; why does EBIT Increase?

#2

Because “sale of receivables w/recourse” is treated as part of operating activity and the amount received increase earnings.

#3

In my opinion, Sale of Receivables should not have any effect on any of Income Statement items. Receivables have accrued because of credit sales, and these sales have already been included in your Income Statement. I/S should not be affected by when and how those credit sales are converted into cash. What will get effected though is CFO. CFO will increase due to Sale of Receivables. Can you quote, where it says about increase in EBIT. I am curious to be corrected.

#4

From what I understand, firm that sell off receivables to SPE record it as an income on the I/S. Thats why the EBIT increase. Of course as an analyst, we should not view it this way and will do the necessary adjustment. Correct me if I’m wrong.

#5

rus1bus Wrote: ------------------------------------------------------- > In my opinion, Sale of Receivables should not have > any effect on any of Income Statement items. > > Receivables have accrued because of credit sales, > and these sales have already been included in your > Income Statement. I/S should not be affected by > when and how those credit sales are converted into > cash. > > What will get effected though is CFO. CFO will > increase due to Sale of Receivables. > > Can you quote, where it says about increase in > EBIT. I am curious to be corrected. Valid reasoning. I was also thinking of same thing.

#6

Revenant, it is already recorded as sales and hence as earnings, at the time WHEN credit sale was made. This is what accrual basis of accounting is about. Subsequently, whenever AR gets converted to cash and how it gets converted, does not effect existing earnings. When AR is converted to Cash, it is just one Asset A/C ‘AR’ getting converted to another Asset A/C ‘Cash’. No effect on Income Statement. Since gazhoo is taking about EBIT being effected, I am curious to read the text and explanation, where it says that.

#7

where does it say so in the text? cos if it does in some accounting norm then it cud be a good trick qn on the exam

#8

Hi, schweser book 3 accounting page 246.

#9

Cash AR end of story