You have recently been hired as an equity analyst at a large mutual fund. During your first week, you receive the following memo: Welcome to Vitality Mutual Funds. I am sure you are excited to join our firm as a fi-nancial analyst. I am currently looking at the financial statements of Spiegel, Inc., which is a multi-channel specialty company that owns Spiegel, Eddie Bauer, and Newport News. The company also owns First Consumers National Bank (“FCNr). FCNB is a special purpose bank limited to the issuance of credit cards, primarily FCNB Preferred Charge cards for use by Spiegel, Eddie Bauer and Newport News customers. I need your assistance in analyzing the company’s accounts receivable. I did some cur-sory analysis and identified some very interesting trends. During 1994 and 1995, the growth in sales has outpaced the growth in receivables. In fact, during 1995, while the company’s net sales grew at around 7%, its receivables decreased by more than 30%! I am quite pleased with the improvement in receivables management. In fact, the receivable collection period has dropped from around 140 days to less than 120 days. This is quite impressive given that the company relies very heavily on installment sales to generate a substantial majority of its revenue. However, I am not sure how Spiegel is accounting for the sale of receivables or how the factoring of receivables impacts my calculations. One additional thing that I can’t understand is why Spiegel Is showing a portion of the allowance for sales returns under accrued liabilities. I am under the impression that such allowance accounts are contra-asset accounts. What I need from you is a succinct report (with supporting analysis) addressing the issues that I have raised in this memo. To help you in your analysis, I have included below some information that I have on the company. Good luck. Sincerely, Maria S. Kang Senior Analyst Vitality
This is a group submission. Please assign this submission task to one of your team members and ensure that one and ONLY one assignment is submitted. There is no need for all students to submit.
- The report should be formatted in a single Microsoft Word document. It weighs 40 marks of the total assessment mark. 2. You must use this Final Report Student Template to write your final report. The template is formatted with the items you should address. Marks are allocated accordingly. Do not change the format of the document. Delete the guidelines and address the points and questions as much as possible.
The following table provides an adapted breakdown of the net receivables balance reported in comparative balance sheets:
During 1995, 1994, and 1993, the company transferred portions of its customer receivables to trusts which, in turn, sold certificates representing undivided interests in the trusts to investors. These transactions are similar to the factoring of receiv-ables, except that a group of investors, as opposed to a single factor, is investing in the receivables of Spiegel. That is, this was a securitization of the receivables. Certifi-cates sold were $700,000 in 1995 (under two separate transactions of $350,000 each) and $150,000 and $330,000 (in 1994 and 1993, respectively). As a result of these transactions, other revenue increased by $18,637 and $10,658 in 1995 and 1994, respectively, representing the gain on the sold receivables that existed at the date of the transaction. The receivables were sold without recourse, and the bad debt reserve related to the net receivables sold has been reduced accordingly. Note that Spiegel is still responsible for sales returns, although the investors in the securitized receivables bear the bad debt risk. As cash is collected from the customers, Spiegel pays only the required interest portion to the investors and reinvests the remaining cash flows in new accounts receivables that are generated (i.e., the investors are con-tinually refinancing the receivables of Spiegel over the duration of the securitization agreement). The company owns the remaining undivided interest in the trusts not represented by the certificates (i.e., Spiegel is retaining ownership of a portion of the securitized receivables which is included under “Receivables Owned”). In addition, the company will service all receivables for the trusts (i.e., Spiegel is performing the administrative aspects of collecting and distributing the cash flows from the receiv-ables). The company reported the following sales figures over the three-year period:
For the Years Ended December 31 1995 1994 1993
Net sales $2,886,225
$2,706,791 $2,337,235
In addition, the following table provides information on the company’s allowance for doubtful accounts over the same period:
Allowance for Doubtful Accounts 1995 1994 1993 Beginning balance $49,954 $46,855 $37,231 Charged to earnings 91,612 79,183 69,160 Reduction for receivables sold (33,600) (6,300) (1,609) Other -0- -0- 695 Accounts written off (67,134) (69,784) (58,622) Ending balance $40,832 $49,954 $46,855
‘Other” represents the beginning tri 1993. The Company’s accrued liabilities tbrns” of S31,927 This breakdown is
balance of Newport News, which was acquired at the end of 1995 include “Allowance for re-not available for the prior two years.
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