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A firm has a current ratio greater than 1.0. During the course of the year the...

A firm has a current ratio greater than 1.0. During the course of the year the firm sells $60 million of accounts receivable with limited recourse. If it had not sold the receivables it would have taken out a short-term loan. The effect of selling the receivables is:

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Answer #1

The current ratio of the firm is greater than 1.0. This means that the firm has more current assets than current liabilities. In case the firm sells account receivables during the year, which is classified as current assets, the current ratio of the firm will remain same as the cash will increase by a proportional amount. In case the firm has not sold the account receivables and instead raised a short term loan, the effect on current ratio would be similar. With increase in short term loan, which is classified as current liabilities, the current ratio of the firm would decrease.

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