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Analysis of Bad Debts
Difficulty: Advanced
Allowance for doubtful accounts receivable (bad debts) is a contra account which reduce the balance of the company's gross accounts receivable.The relationship between the allowance and the balance in receivables should be relatively constant unless there is a change in the economy overall or a change in customer base.
Receivables Accounting Policy
Trade accounts receivable, net
Trade accounts receivable are recognized at the invoiced amount and do not bear interest. Accounts receivable are reduced by an allowance for doubtful accounts, which is Broadcom's best estimate of the amount of probable credit losses in the existing accounts receivable. Broadcom determines the allowance based on customer-specific experience and the aging of such receivables, among other factors. Allowances for doubtful accounts were not material as of October 29, 2017 and were $9 million as of October 30, 2016. Accounts receivable are also recognized net of sales returns and distributor credit allowances. These amounts are recognized when it is both probable and estimable that discounts will be granted or products will be returned. Allowances for sales returns and distributor credit allowances at October 29, 2017 and October 30, 2016 were $208 million and $283 million, respectively.
Source: Broadcom Inc., Annual Report
Allowance for Doubtful Accounts Receivable
Source: Based on data from Broadcom Inc. Annual Reports
2017 Calculations
1 Allowance as a percentage of trade accounts receivable, gross = 100 × Allowances for doubtful accounts ÷ Trade accounts receivable, gross
= 100 × ÷ = %
| Ratio | Description | The company |
|---|---|---|
| Allowance as a percentage of trade accounts receivable, gross | Allowance for doubtful accounts divided by the gross accounts receivable. | Broadcom Inc.'s allowance as a percentage of trade accounts receivable, gross increased from 2015 to 2016 but then declined significantly from 2016 to 2017. |
