• Take-or-pay contracts and throughput agreements
    These types of agreements effectively allow companies to keep some operation assets and liabilities off the balance sheet. As a result, in the analysis of a company's financial statement, the balance sheet should be restated and include the present value of the minimum future payments to both the assets and liabilities section of the balance sheet. If this is not done, the debt-to-equity and asset-turnover ratio will be overstated.
  • Sales of receivables
    Sales of receivables artificially reduce the receivables and short-term borrowing needs. Furthermore, they distort the pattern of cash flow from operations as the firm receives cash earlier than it would if the receivables had been collected in due course.

    In addition, the potential liability associated with the buyer-recourse provision is not displayed on the balance sheet. From an analytical point of view, the current-asset ratio, working capital and receivable turnover will be overstated.

    On the other hand, the leverage ratios such as debt-to-equity will be too high. The reported income will also be too high because if it did not sell its receivables, the company would have had to borrow the funds it acquired from the sale of the receivables to finance its current operations.

    Analysts should adjust the balance sheet by adding back the amount of accounts receivables sold and increase short-term borrowing by an equal amount. Furthermore, the income statement needs to be restated and include the interest expense that would have been incurred by the firm had it not sold its receivables and borrowed the money instead.



Accounting For Leases

Related Articles
  1. Investing

    Reading The Balance Sheet

    Learn about the components of the statement of financial position and how they relate to each other.
  2. Investing

    Breaking Down The Balance Sheet

    Knowing what the company's financial statements mean will help you to analyze your investments.
  3. Investing

    Useful Balance Sheet Metrics

    These metrics can help you better understand the information found on balance sheets.
  4. Investing

    Understanding Leverage Ratios

    Large amounts of debt can cause businesses to become less competitive and, in some cases, lead to default. To lower their risk, investors use a variety of leverage ratios - including the debt, ...
  5. Investing

    Off-Balance-Sheet Entities: An Introduction

    The theory and practice of these entities varies greatly. Investors need to learn what they're getting into.
  6. Investing

    Understanding Off-Balance Sheet Financing

    For anyone who was invested in Enron, off-balance sheet (OBS) financing is a scary term. Off-balance sheet financing means a company does not include a liability on its balance sheet. It is an ...
  7. Investing

    How To Read Apple's Balance Sheet

    We explain how to find, read, and analyze a balance sheet from Apple.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center