Analysis of Bad Debts
Allowance for doubtful accounts receivable (bad debts) is a contra account which reduce the balance of the company 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.
Allowance for Doubtful Accounts Receivable
Based on: 10-K (reporting date: 2018-06-30), 10-K (reporting date: 2017-06-30), 10-K (reporting date: 2016-06-30), 10-K (reporting date: 2015-06-30), 10-K (reporting date: 2014-06-30), 10-K (reporting date: 2013-06-30).
1 2018 Calculation
Allowance as a percentage of receivables, gross = 100 × Allowances for returns and doubtful accounts ÷ Receivables, gross
= 100 × 388 ÷ 8,232 = 4.71%
Between the fiscal years ending June 30, 2013, and June 30, 2018, a significant divergence is observed between the growth of gross receivables and the corresponding allowance for returns and doubtful accounts. While the total volume of receivables increased, the reserves maintained to cover potential losses decreased substantially.
- Gross Receivables Analysis
- Gross receivables exhibited a general upward trajectory, rising from 6,795 million US dollars in 2013 to 8,232 million US dollars in 2018. Despite a notable contraction in 2015 to 6,812 million US dollars, the overall trend reflects a steady increase in the total volume of outstanding credit.
- Allowance for Returns and Doubtful Accounts Trend
- The absolute value of the allowance for returns and doubtful accounts experienced a sustained decline, falling from 899 million US dollars in 2013 to 388 million US dollars in 2018. A sharp reduction was recorded between 2014 and 2015, where the reserve dropped from 815 million to 506 million US dollars.
- Credit Risk Proportion
- The allowance as a percentage of gross receivables decreased consistently from 13.23% in 2013 to 4.71% in 2018. This compression of the ratio indicates a marked reduction in the expected loss rate relative to total receivables, suggesting an improvement in credit quality, more effective collection processes, or a revision in the accounting estimates for bad debt.
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