A firm has a current ratio greater than 1.0. During the course of the year the firm sells $60M of accounts receivable with limited recourse. If it had not sold the receivables it would have to have taken out a short-term loan. The effect of selling the receivables is: $$\begin{array} { | l | c | c | }
\hline & \text { Accounts Receivable Turnover } & \text { Current Ratio } \
\hline \text { A) } & \text { higher } & \text { lower } \
\hline \text { B) } & \text { higher } & \text { higher } \
\hline \text { C) } & \text { lower } & \text { lower } \
\hline \text { D) } & \text { lower } & \text { higher } \
\hline
\end{array}$$
A) Option A
B) Option B
C) Option C
D) Option D

Question

A firm has a current ratio greater than 1.0. During the course of the year the firm sells $60M of accounts receivable with limited recourse. If it had not sold the receivables it would have to have taken out a short-term loan. The effect of selling the receivables is: $$\begin{array} { | l | c | c | } 
\hline & \text { Accounts Receivable Turnover } & \text { Current Ratio } \
\hline \text { A) } & \text { higher } & \text { lower } \
\hline \text { B) } & \text { higher } & \text { higher } \
\hline \text { C) } & \text { lower } & \text { lower } \
\hline \text { D) } & \text { lower } & \text { higher } \
\hline
\end{array}$$
A) Option A
B) Option B
C) Option C
D) Option D

Quizplus · Accepted Answer

Selling accounts receivable increases accounts receivable turnover because it reduces the average accounts receivable balance. It also lowers the current ratio because it decreases current assets without affecting current liabilities.

A Firm Has a Current Ratio Greater Than 1 A) Option a B) Option B C) Option C D)

A Firm Has a Current Ratio Greater Than 1 A) Option a
B) Option B
C) Option C
D)