FRA Reading #27 EOC #17

[dlanuez]

Had the securitized finance receivables been held on the balance sheet, the software services ratio of liabilities to total capital would have been closet to: b. 74.8%
I dont understand in the explanation provided with this solution. It says had the receivables been held on the balance sheet, the assets and the liabilities would have been $267,500 higher. I do not understand why the liabilities would have been affected. By selling the receivables, the accounting equation assets = liabilities + equity would have stayed in balance by reducing receivables and increasing cash for the sale. Thus, by not selling, you are simiply cash is lower and receivable are higher, how does that affect liabilities?

 

[Thecodont]

I just looked at the question too. It does not make sense to me either

 

[Vid]

The question asks if “was held on balance sheet”. If they were held on balance sheet you have $267.5 worth of debt = increase liablity.
I.e You never gave the cash back, you effectively borrowed it

 

[kyrylo]

I recently posted the same question. The thing is that if you had not securatizied the recevable, you would need to borrow money (the cash). Thus, your liabilities would be higher by this amount.

 

[Thecodont]

that was my inital thought and is clealry the answer but the question makes it hard to get to the right answer because “if it was held on the balance sheet” does not necssarily mean that you borrowed against the AR. It could mean that you just held it on your balance sheet as AR. The information in the vingete does not provide any information that cash has gone up.

 

[Vid]

Actually, it is clear.
The question says the “SECURITIZED” receivables. Therefore -> increase cash.