my understanding is that a company recognizes this as a sale. How is this allowed? Wouldn’t this be selling a sale??
No, accounts receivable are assets. You can sell an asset. A/R is on the asset side balance sheet.
Not a problem. You need to careful on how they classify the resulting cash-flow. Company will make this as CFO, this can be CFO if it is securitized. CFF if not.
I know assets AR is on the balance sheet, but aren’t there instances when you recognize the sale of an asset in sales? i.e. INVENTORY There is a problem in Schweser that shows that sales of receivables should be removed from sales. This would imply that the sale of receivables is included in sales. Isn’t this recording a sale twice? Once when you sell the product, and again when you sell the AR?
It is pretty obnoxious. An A/R is an uncollected sale, or a sale where the benefits are expected but not received. If you sell the A/R, you are only realizing the benefits plus a premium (or not). Only the excess should be included in sales, but it would be better to have the entire amount in a separate, non-operating category.
nyfinance Wrote: ------------------------------------------------------- > It is pretty obnoxious. An A/R is an uncollected > sale, or a sale where the benefits are expected > but not received. If you sell the A/R, you are > only realizing the benefits plus a premium (or > not). Only the excess should be included in sales, > but it would be better to have the entire amount > in a separate, non-operating category. That is what I thought, but I worked a problem in Schweser where it implied that the sale was included in “Sales”, but to clarify: If a company sells AR, or securitizes them and sells them, a sale should only be reported if there is a gain/loss from the sale, correct??
You are right that the gain/loss is the only thing to appear on the income statement, but it doesn’t have to appear in sales. It can appear pretty much wherever the company wants it.
i think the terminology to mention them as sales is a little misleading. from an accounting bookkeeping perspective, the entry to record the transaction is: dr cash cr ar in that entry no entry is made to “sales”. i can’t think of any way you could actually book the sale of ar to sales. its simply a balance sheet transaction. i can think of ways to get a gain on the sale, but that goes somewhere else. the effect, though, is that ar goes down by the amount that is securitized. a decrease in ar is a positive cash flow which increased cfo. this is what ws is referring to. also, a company can only put items that it sells in the sales line if selling that item is a part of its business. for example, if caterpillar were to sell some old computers, any gains would not go to sales but to other gain/loss, or something like that. just selling an asset doesn’t qualify as sales, per se. it has to be part of its business.
In terms of gain/loss on sales, I think that the company can add that to sales. The CFAI text gives some examples where the gain/loss is placed in revenues, or debited from SGA or CGS expenses, or recorded in a separate item below the line, all at the discretion of the management.