farrukhsadiq

ov25

If we are talking about collateralized loan, then the receivables are not removed from the book, but record the loan transaction like if you issue a short-term balloon payment bond/loan.
DR cash 95
DR prepaid interest 5
CR Loan payable 100

If the loan is repaid before balance date --> same case as above.
If not, the loan still stays on the book (assuming further that the company does calculate the accrued interest, most don't in reality for short period)

In this case, EBIT stays same, interest increases so interest coverage decreases.

Debt increases and Equity decreases --> D/E increases.

Increased D/E since debt increases and equity lower because of increased interest expense as you mentioned earlier.

current ratio would be hard to predict, since both current asset and current liabilities increases.

rus1bus
>The cash you got could go in repaying some short term debts and thus reducing your
> Interest Expense.

Two things:
- Not sure you can make that assumption (which may or may not be true).
- Even if true, it still may not change the conclusion since say you get 100 from sales (which has implicit financing rate of 6%) and you use it to pay down your short term debt with 4% rate --> your net interest expense still increases.

>Regarding discount on Sale of Receivables reducing CA, it is not true.
> $100, 3 months from now is worth $90 today anyways (discounted by firm's avg debt rate)

Well, it is common practice that the buyer of your receivables to pay you a lower amount for what he expects to get in the future (if he thinks he will have any non-collections, the rate will be higher, as well as their admin cost) and the discount rate can be quite high, so firm avg. debt rate may not be relevant here, in my opinion.