Which statement is correct?

Question

Quizplus · Accepted Answer

Factoring without recourse typically involves selling receivables to a factor, which removes them from the balance sheet and provides immediate cash, thus reducing receivables and increasing cash. If the current ratio (current assets/current liabilities) is greater than 1, reducing receivables without increasing current liabilities improves the current ratio, not reduces it. However, the statement as presented is incorrect because the action described actually improves the liquidity position (current ratio) rather than reducing it if the ratio is already greater than 1. The correct interpretation of the impact on the current ratio would depend on the specific balance sheet figures, but the general expectation is that factoring without recourse would not reduce a current ratio that is greater than 1; it could potentially improve it by converting receivables into cash. This explanation corrects the misunderstanding: factoring without recourse does not create a receivable or a liability; it removes a receivable, potentially improving liquidity and working capital, contrary to the implications of options A, C, and D.

Which Statement Is Correct