1. Show journal entries for Spiegel's receivables sales in 1994 and 1995.

2. Calculate the growth rates from 1993-1994 and from 1994-1995 of: sales, net A/R, and receivables generated from operations.

3. Using both net A/R and receivables generated from operations, calculate Spiegel's A/R collection period for 1994 and 1995.

A/R collection period =

365*(average of beginning and ending A/R), divided by annual sales.

4. Is Spiegel's A/R collection improving or worsening?

Please answer 1-4 based on the information above.

08-3 You have recently been hired as an equity analyst at a large mutual fund. During your first week, you receive the following memo: Spiegel, Inc. (KR): Analyzing receivables 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., growth which is a multi-channel specialty company that owns Spiegel, Eddie Bauer, and Newport News. The.company also owns First Consumers National Bank ("FCNB"). 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 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. Whti 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 Mutual Funds 32 The following table provides an adapted breakdown of the net receivables balance reported in comparative balance sheets: As of December 314 1994 1995 1993 Receivables generated from operations Receivables sold Receivables owned Less: Allowance for returns Less: Allowance for doubtful accounts Receivables-net (from balance sheet) $2,001,081 (1,180,000) 821;081 (37,769) (40,832) $ 742,480 $1,683,444 (480,000) 1,203,444 (27,762) (49,954) $1,125,728 $1,403,618 (330,000) 1,073,618 (28,238) (46,855) 998,525 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- 695 Accounts written off (67,134) (69,784) (58,622) Ending balance $40,832 $49,954 $46,855 "Other" represents the beginning balance of Newport News, which was acquired turns" of $31,927. This breakdown is not available for the prior two years. The company's accrued liabilities at the end of 1995 include "Allowance for re- in 1993. 08-3 You have recently been hired as an equity analyst at a large mutual fund. During your first week, you receive the following memo: Spiegel, Inc. (KR): Analyzing receivables 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., growth which is a multi-channel specialty company that owns Spiegel, Eddie Bauer, and Newport News. The.company also owns First Consumers National Bank ("FCNB"). 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 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. Whti 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 Mutual Funds 32 The following table provides an adapted breakdown of the net receivables balance reported in comparative balance sheets: As of December 314 1994 1995 1993 Receivables generated from operations Receivables sold Receivables owned Less: Allowance for returns Less: Allowance for doubtful accounts Receivables-net (from balance sheet) $2,001,081 (1,180,000) 821;081 (37,769) (40,832) $ 742,480 $1,683,444 (480,000) 1,203,444 (27,762) (49,954) $1,125,728 $1,403,618 (330,000) 1,073,618 (28,238) (46,855) 998,525 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- 695 Accounts written off (67,134) (69,784) (58,622) Ending balance $40,832 $49,954 $46,855 "Other" represents the beginning balance of Newport News, which was acquired turns" of $31,927. This breakdown is not available for the prior two years. The company's accrued liabilities at the end of 1995 include "Allowance for re- in 1993