Sears Credit Card Receivables Essay

(A2.1) In the annual report of the company, Sears recognized its credit card receivables as a net allowance for uncollectible accounts. The allowance was reported as affected by “the impaired accounts, historical charge-off patterns and management decisions.” In 1998, the management automatically recognized the uncollectible accounts against customers who had balance that was past due by eight times the minimum monthly payment. In this way, Sears can identify the delinquent accounts and control the “uncollectible expenses.” By identifying customers’ payment delinquency, charging off balances can be effected much sooner. It can be realized that the company made efforts to resolve the issues that pertain to financial reporting of uncollectible

The reliance on sales income and revenues from credit is distinct, most especially projected in the balance sheet statement under the account of credit card receivables. It can be realized that Sears has managed to report a stable net income for 1999, despite of the declining monthly trend of the company’s stock prices. However, because a large percentage of current assets of the company are proportioned to credit card receivables, the working capital and liquidity of Sears are apparently highly risky and obscure. Moreover, there are many delinquent credit accounts that the company must struggle to collect. In spite of the strategies that the company imposes, in terms of higher interest rates and minimum monthly payments that it offers to its credit customers, the problem mainly lies on the resources from which the customers can take the payments. On the first hand, the credit cards are easily offered to customers without actually conducting a rigid assessment of the risks and level of income that each account is characterized. Thus, delinquency is highly