SELLING RECEIVABLES. The Tyson Foods, Inc. annual report for 1993 includes the following note to the financial statements:

In April 1990, the Company entered into an asset sale agreement with an unrelated financial institution to sell approximately $200 million of accounts receivable. In December 1992, this sale agreement was amended and the Company is now able to sell up to $275 million of accounts receivable. As sold accounts receivable are collected, new qualifying accounts are substituted such that the outstanding balance remains at $275 million. As part of the accounts receivable sale transaction, $27.6 million of additional accounts receivable are designated to offset any additional costs that may be incurred under the limited recourse provisions. Although this represents the maximum possible credit loss to the Company, historical losses have been substantially less.

The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. At October 2, 1993, the Company does not have significant credit risk concentrations. No single group or customer represents greater than 10% of total accounts receivable.

REQUIRED:

1. What effect does the sale of additional accounts receivable have on Tyson’s financial statements? What effect does the collection of sold receivables and the substitution of “new qualifying accounts” have on Tyson’s financial statements?

2. Explain the effect on financial statements of designating additional receivables under “limited recourse provisions.” What are these provisions, and what is meant by the designation of receivables?

3. Why would a stockholder in Tyson foods be interested in the disclosures made in the note reproduced above?