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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
Accounts receivable and allowances
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. 3M maintains allowances for bad debts, cash discounts, product returns and various other items. The allowance for doubtful accounts and product returns is based on the best estimate of the amount of probable credit losses in existing accounts receivable and anticipated sales returns. 3M determines the allowances based on historical write-off experience by industry and regional economic data and historical sales returns. 3M reviews the allowance for doubtful accounts monthly. 3M does not have any significant off-balance-sheet credit exposure related to its customers.
Source: 3M Co., Annual Report
Allowance for Doubtful Accounts Receivable
Source: Based on data from 3M Co. Annual Reports
2017 Calculations
1 Allowance as a percentage of accounts receivable, gross = 100 × Allowances ÷ Accounts receivable, gross
= 100 × ÷ = %
| Ratio | Description | The company |
|---|---|---|
| Allowance as a percentage of accounts receivable, gross | Allowance for doubtful accounts divided by the gross accounts receivable. | 3M Co.'s allowance as a percentage of accounts receivable, gross declined from 2015 to 2016 but then increased from 2016 to 2017 not reaching 2015 level. |
