The correct answer for the following questions is A, but can anyone please explain why it is not B. Thanks. An analyst gathered the following information for a company for the year ending 31 December 2000: Debt $1,000,000 Equity $500,000 Debt-to-equity ratio 2.0 EBIT $200,000 Interest expense $50,000 Coverage ratio 4.0 The amount of receivables sold during this period was $150,000 and was not used to retire debt. Also, the sale has not transferred the risk of the receivables. The analyst is trying to make adjustments to the financial statements to reflect off balance sheet activities. To adjust the effects of off balance sheet financing on cash flows, the analyst should: A) increase the cash flows from financing. B) increase the cash flows from operations. C) increase the cash flows from investing. D) decrease the cash flows from investing
Sale of receivables when credit risk is not transferred should be treated as borrowings. Since new borrowings are accounted for in CFF, an analyst to increase CFF and decrease CFO.
I think we had this question before So what happens is that you sell some receivables The CFO is overstated you received the money for receivables but they are still your responsability, you just found new financing for them through the company you sold them to. So basically you should reduce the CFO by that amount and increase the amount of CFF
Plus they tell you the money was not used to retire debt. If it was , there would be an CFF outflow in the same amount so overall there would be no adjustment
Sale of Receivables with recourse transaction is always considered as a financing activity. - Dinesh S