Can someone please tell me once and for all how to deal with this: Company sold $500 in receivables review of footnotes revelas credit risk was not transferred on sale Why would someone decrease cash flow from operations and increase CFF to deal with this? Also generally how would an analyst deal with it. From my understanding it’s: Increase Current Assets Increase Current Liab and that’s it.
When they sold the receivables, they probably logged the incoming cash as cash flow from operations. You should undo that by subtracting it from CFO. Really it’s a collateralized loan, so the inflow belongs in CFF, to which it should be added. Your balance sheet adjustments are correct – A/R and short-term debt should be increased.
because the decrease of receivables have been recorded as increase of operation cashflow, but the transaction should be considered no more than collateral borrowing. So the cash inflow should be seen as a financing activity. that is why the operation cashflow should go down and the CFF should go up as an adjustment. also increase assets and liab.
yup, thats exactly it… just remember: Company sold $500 in receivables
How many cents on the dollar does the firm usually sell those receivables for? Why would the purchasing firm (in CFAI test: normally a financial institution or investor group) want to take on the potential risk of not being paid (if the allowance for doubtful A/R is high in comparision to the sell of the receivables)?
Cents on the dollar depends on the types of receiveables. Many companies deal with potentially bad receivables by requiring they are replaced with non-past-due receivables (agreement may state receivables over 90 days past due are replaced by current receiables, mitigating risk to buyer)
And the company selling them. If people buy unsecured debt why wouldn’t they buy debt with some collateral? Somewhere out there is probably some study about the quality of sold receivables as debt but I’ll bet the recovery value is really high for most receivables because your first creditors are a diverse (hopefully) lot and then you have a pretty junior claim on the company which is still worth something even in dire circumstances. Anybody know the real story?
Receivables and inventory are considered very high quality collateral in most cases. For asset backed lending, the haircut on value might only be 25%. Compare that to up to 75% for fixed assets.
If I’m not wrong, I think this question refers to a factoring company buying the receivables at a certain discount in order to help the selling company smoothen its cashflows and assist in building working capital… in some cases they charge a fee. But is it to be considered as a collateralized loan?
This is the “find the economic reality” sort of FSA. Selling receivables with recourse is economically the same as borrowing money and putting up your receivables as collateral. If you recognize those are the same, you would take the sale of receivables and add the amount back to short-term debt.