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.
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Allowance for Doubtful Accounts Receivable
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Allowance as a percentage of accounts receivable, gross = 100 × Allowances ÷ Accounts receivable, gross
= 100 × ÷ =
The financial data reveals notable trends in allowances and accounts receivable for the period from 2017 to 2021. Over these five years, allowances have generally increased, rising from 103 million US dollars in 2017 to a peak of 233 million in 2020 before declining to 189 million in 2021. This indicates a rising trend in provisions for doubtful accounts with a slight reversal in the last recorded year.
Accounts receivable, gross, show a relatively stable pattern with minor fluctuations. Starting at 5,014 million US dollars in 2017, the figure increased slightly to 5,115 million in 2018 but then trended downward over the next three years, ending at 4,849 million in 2021. This suggests a modest reduction in total gross receivables in the latter part of the period.
The allowance as a percentage of accounts receivable, gross, reflects the extent of allowances relative to receivables. This ratio decreased from 2.05% in 2017 to a low of 1.86% in 2018, then increased substantially to 4.72% in 2020 before settling at 3.9% in 2021. The rising allowance percentage after 2018 implies increasing caution in recognizing potential credit losses or deteriorating credit quality.
Overall, the data indicates that while the total accounts receivable remained relatively stable with a slight decline towards the end of the period, the company increased its allowance for doubtful accounts significantly, especially from 2018 to 2020, signaling heightened vigilance on credit risk during this period.